Navigating the Rough Seas of Hard Reinsurance Market

With recent reinsurance policy renewals, based on our observations, some insurers have income on reinsurance purchase and this was particularly common in insurance markets prone to natural catastrophe events. To make matters worse, some insurers had to increase their retention levels to manage substantial increases in reinsurance costs, leaving them with limited premium income to cover the increase in retained losses and other expenses. That’s why having a well-planned strategy is paramount for a successful reinsurance policy renewal.

This article explains some actions insurers could take to manage their reinsurance costs and successfully navigate hard reinsurance market conditions, which are expected to last for the foreseeable future, and builds upon a previous article covering actions insurers could take to address the challenges of reinsurance renewal in a hard reinsurance market.

Flight to data quality

There has been a shift observed in improving data quality with recent reinsurance policy renewals.

Reinsurers now put more emphasis on data quality than previously by demanding additional and more granular data. With inflation being a major driver for the increase in reinsurance costs, reinsurers accordingly require details on how inflation is being handled within original pricing and in claims management.

Reinsurers are likely to penalise insurers for poor data quality with additional loadings on premiums and, in some extreme cases, could refuse coverage. The last thing an insurer would want is additional charges or the refusal of coverage due to poor data quality. Therefore, improving data quality is a very important step an insurer should take in its reinsurance renewal strategy. A previous article, “Data quality – the key for reinsurance protection” offers more details on basic data requirements and how to improve data quality. 

More than one quote on reinsurance cover

Relying only on a single quote is not ideal for a reinsurance renewal strategy. More than one quote from several reinsurers could provide an insurer with insights into how reinsurers view their risks and could facilitate informed decision-making on a quote that is competitive and within budget.

However, insurers should be aware that adopting the cheapest quote may have unintended consequences, particularly in a hard market. For example, with the recent renewal of a reinsurance program, an insurer decided to accept the cheapest quote despite its broker raising concerns about the risk of finding support from the market with such a quote. This resulted in the insurer being left with a substantial shortfall and scrambling for support post-renewal, resulting in additional reinsurance costs as reinsurers took advantage of the predicament.

As observed in recent reinsurance renewals, reinsurers tended to keep pricing discipline and were prepared to walk away when they deemed the pricing was inadequate. This was particularly observed with reinsurers with better credit ratings quoting for natural catastrophe exposed risks. Insurers should try to strike the right balance between possible reinsurance cost savings achievable and finding market support. A good reinsurance broker can help facilitate decision-making on finding the right balance with its deep market knowledge and analytical capabilities.

Building a long-term partnership

Unlike in the past, reinsurance purchases are no longer considered a mere transactional service. Building a long-term partnership between an insurer and a reinsurer could benefit both parties.

Reinsurers who are already on an insurer’s reinsurance panel are likely to have a better view of the insurer’s portfolio, business strategy and underwriting philosophy than a new reinsurer. Armed with such insights, reinsurers who are already on a reinsurance panel are likely to quote more competitively and provide better support than a new reinsurer.

A new reinsurer is likely to put additional loadings on pricing to reflect the uncertainly of not knowing an insurer well enough. Therefore, giving preference to reinsurers who are already in a reinsurance panel could benefit an insurer when seeking support. The hard reinsurance market could also provide insurers with insights into who are genuine partners and who are opportunistic based on how reinsurers react and respond to an insurer’s reinsurance coverage requirements.

Reinsurance market visits

As part of the reinsurance renewal strategy, an insurer could consider visiting reinsurers well before the renewal process begins to provide them with a better view of the insurer’s business, growth plans and underwriting philosophy.

This provides an opportunity to get to know decision-makers at a professional level as well as a personal level. In fact, such visits could lay the basic foundation for building a successful long-term partnership between an insurer and a reinsurer.

Structural changes and cost-benefit analysis

The prevailing hard reinsurance market has forced many insurers to change their reinsurance structures to manage substantial increases in reinsurance costs. Some of the changes include an increase in retention levels (i.e., increase in deductibles), lower event limits, more onerous terms and conditions, and in some drastic cases, the dropping of proportional structures for non-proportional only structures (i.e. moving to Gross XOL structures).

Changes in the structure of the reinsurance program, in particular, could have a significant impact on the bottom line (i.e., net underwriting results) of an insurer. A proper cost-benefit analysis could greatly help an insurer to quantify the impact on the bottom line and make an informed decision on a cost-effective optimal reinsurance structure that meets its risk appetite and capital requirements. An insurer could seek help from its reinsurance brokers to carry out detailed Dynamic Financial Analysis (DFA) for which the brokers tend to have expertise and tools to do so.

Close collaboration with reinsurance brokers

Good reinsurance brokers tend to have deep market knowledge and close relationships with underwriters and are well equipped with strong analytical capabilities.

Reinsurers may have preferences for certain classes of business, insurance markets and reinsurance structures (e.g., preference for non-proportional structures over proportional structures and vice versa). A broker having intimate knowledge of reinsurers’ preferences could connect reinsurers with insurers matching their preferences thus improving the possibility of securing support. This article also covered how analytical capabilities of brokers could facilitate the informed decision making on reinsurance structures. Therefore, a close collaboration with reinsurance brokers is essential for a successful reinsurance renewal strategy.

Looking forward

The hard reinsurance market is likely to prevail for the foreseeable future. Navigating it successfully could be challenging for insurers, particularly with potential increase in reinsurance costs and in finding support for reinsurance coverage.

To address these challenges, insurers should consider improving data quality, receiving multiple quotes from more than one reinsurer, conducting cost benefit analysis of different structures and building a long-term partnership. A well-planned reinsurance renewal strategy could greatly help an insurer in successfully navigating the rough seas of hard reinsurance market.

The author would like to thank Mudit Gupta (FIAA) and William Pang for reviewing the article and providing invaluable feedback.

References

^[1] https://www.irmi.com/term/insurance-definitions/hard-market

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