Relevance should be the new reinsurance buzzword. The influx of new capital and changing buyer behaviour – evolution for both supply and demand – has begun the process of natural selection and those reinsurers not wishing to adapt in a changing global reinsurance climate will surely tread the path towards extinction. As buying habits evolve then so must seller behaviour.
Starting with a blank piece of paper
The reinsurance landscape has changed. Buyers have strong capital positions; they are confident in retaining more risk; reinsurer panels are being consolidated; while their purchasing has also been centralised on a global scale. On the other side of the coin, the changes in capital supply have been no less significant. Non-traditional entrants, unencumbered by decades of pre-conceived ideas of how reinsurance should be sold, have introduced a fresh new way of marketing themselves – perhaps in a way that every reinsurer would choose if they started afresh with a blank piece of paper. Why wait for the orders to come in when, set free from the traditional reinsurance cycle, you can proactively go out there and hunt for business at any time?
So far, many traditional players have countered through the favoured incentives of a bygone era. Multi-year deals, increased hours clauses, generous reinstatements, cancellation clauses...all well used soft market carrots from yesteryear, are all truly back with a vengeance. And, in reality, their impact probably equates to another 5-10% off those headline rate reductions we've seen recently.
For buyers it's great news with more choice and more cover for less. For underwriters however, these trinkets simply disguise a more fundamental problem with how they sell reinsurance versus the new competition.
The game is far from over
All that said, the game is far from over. No one is better placed to meet the requirements of a cedant than a traditional reinsurance carrier who has been trading with them for decades. But only if the reinsurer understands how key relevance is in an increasingly crowded space; whether it's relevance in terms of product, line size, and opinion (advice). It shouldn't be difficult to achieve; after all, the best way of being relevant to your clients is through simply asking, how can we help you? Perhaps a cedant is looking for earnings protection to soothe shareholders' and analysts' concerns? Maybe they need to smooth the volatility in their portfolio? Perhaps they want to explore other ways to help grow their own original insurance business (they're also competing in a pretty fierce market too). How can reinsurers use their underwriting expertise to help their clients build a better, more profitable book? What about rating agency covers or other products that help solve regulatory requirements?
How would you like it wrapped?
The point being, buyers expect more and deserve more, and the traditional market must respond. A shopkeeper won't keep putting out the same product if no one buys it. They'll simply ask their customers what they want and then go out and source it; packaged and delivered in a way that suits the buyer. Reinsurance is not rocket science. Innovation can simply be a tweak on an existing offering to make it far more relevant to the buyer rather than a perpetual search for the next killer product. A start could be a focus on off-cycle discussions with clients, away from the immediate pressure of quoting for an upcoming renewal, which would allow both sides to explore new ideas. A symbiotic relationship between buyer and seller is more likely to reap rewards. For traditional reinsurers to remain relevant though, properly managing coverage changes and product development are absolutely key.
Two products, one market
A useful comparison is the corporate debt market where most large companies have the option to either take a loan from a bank or issue paper in the bond market. The first offers speed, consistency and a reliable counterparty, whilst the second offers volume, near infinite product customisation, but a not-insignificant roll-over risk upon maturity. The reality is that both form a critical part of a company's capital structure and offer an array of pricing, liquidity and structural options to manage risk.
In reinsurance, as alternative capital has matured and become commonplace, buyers are increasingly discriminating between the traditional and non-traditional markets. Sophisticated insurers recognise that their portfolio of coverage should encompass an element of continuity, intellectual capital and value-adding services from their traditional counterparties, together with the opportunistic use of transactional capital.
Heritage still counts for something
Reinsurance heritage still carries weight and who is better placed to understand clients'needs than decade long trading partners? It's the traditional market’s game to lose but tactics and strategy must adapt to a rapidly changing environment. There is no model (business or otherwise) in history that has ever rewarded irrelevance. Only the most relevant will survive in this new world of Darwinian reinsurance.