The changing nature of reinsurance buyers
We’ve all read the headlines: alternative markets drive down reinsurance pricing. It’s a convenient cover whilst the inconvenient truth is that it is shifts in buyer expectations and behaviour that are so fundamentally challenging to both property reinsurance seller and intermediary.
Greater sophistication; improved levels of capitalisation; more consolidated buying – whatever the cause, the demand for mainstream reinsurance products has changed faster than reinsurers’ ability to sustain their value in the eye of the buyer. Clearly if lower price doesn’t encourage more buying, you have to question the products being sold. Help may come from newer, emerging markets in fast developing economies, or the growth of interest in new perils such as cyber risk, but in the absence of either, there is simply not enough traditional risk transfer being sought for the capital chasing it.
In addition to reducing demand, the barriers that previously stemmed a more efficient flow of capital have been removed. Through new structures and the emergence of insurance risk as a mainstream asset class, capacity options for buyers are now much broader. This has brought both a lower cost threshold to challenge the rated model as well as a sense that the scarcity value of capacity post-loss has reduced. Does the perceived opinion that a big loss will chase away alternative capital still hold true? Either way, the dwindling demand for a plain vanilla product from cedents has more than enough suitors.
(Some) relationships count
For the traditional reinsurance market, there is no need to throw the baby out with the bathwater just yet. Underwriters will always need capital (and can benefit from the new alternatives) and it still holds that capital needs underwriters (assuming of course those underwriters can provide what buyers are looking to buy as opposed to what they want to continue selling).
The emergence of new ‘selling styles’ is reflected in buyers looking to develop more strategic, value based relations. The question extends beyond who has the product at the right price but also, who has the underwriting acumen to tackle the breadth of issues I face and coverage I want when I need it?
Experience shows that losses do not fall uniformly and all risk is not homogeneous. Where models are lacking, underwriting facilitates coverage that will respond as expected by buyers. Whether it is in non-modelled territories or claims items not factored (loss adjustment expenses, extra-contractual obligations, excess of policy limits payments), when the out of the box number is not enough, underwriting has its role to play – for both buyer and capital provider.
Buyers, being more holistic in their approach, want a more consolidated purchase, which in turn introduces new perils and classes as well as new territories. Again much of this risk is non-modelled or insufficiently modelled which provides traditional underwriters with an opportunity – provided they can challenge the status quo of a more siloed underwriting approach. Losses are also rarely black or white as our very well honed contract language would attest. But at what point does this all become purely archaic and alienating to the client? Consideration must be given as to where client value can be achieved, what underwriting impact this has and a more tailored and flexible approach delivered.
The great news for clients is that they are benefitting from an increase in choice and efficiency. Buyers able to retain the qualities of an experienced underwriter whilst enjoying the benefits of new capital, creates the real possibility of the reinsurance world developing a far more sustainable and long-term business model.
*This piece originally appeared in Insurance Day on Tuesday 22 April 2014