Non concurrent terms in reinsurance world:
Are industry forces and abundance of capital pushing us to non concurrent reinsurance terms?
I think so….
Time to separate the winners from the losers – and a strong move by reinsurance intermediaries / brokers to non-concurrent reinsurance treaty terms would accomplish just that. We would find out who are the real winners and who are the losers at risk.
As the reinsurance market remains soft and there is talk that the hard market cycle will become a faded memory, we have to ask ourselves:
- Is there a need in this overcapitalized market for following markets taking small lines? Not driving terms?
- Could the capital of following markets be returned to shareholders and be used for more productive uses in society?
- Will following markets shareholders be adequately compensated for the risk on their capital?
- When will cedants and reinsurance intermediaries stop valuing diversification of a panel?
Security
In regards to security, shouldn’t lower rated companies have non concurrent terms due to the strength or weakness of their balance sheets? Or different terms due to leverage of investment portfolio?
Why should A and A- rated companies get access to business at the same cede/terms as an A+ company?
Brokers negotiation
Are reinsurance brokers negotiating the best deal for clients if they don’t insist on non concurrent terms?
Other Winners and losers will be determined and some reinsurance companies may be hurt by this shift, what is the clients best interest?
Should brokers allow capital to continue to access risk at same way other open market business is transacted? Open market bids?
Reinsurers
Reinsurers with efficient forms of capital, low costs of capital, low expenses will be able to pass that through to Cedants. Customers win, cedants win. Competitors will be forced to get less preferred terms or same terms from lower rated reinsurers.
In a sense, commoditize the product…
Talent and compensation
Talent and executive teams will be rewarded accordingly to their ability to generate underwriting and investment profits.
Capital efficiency
Capital will deployed in the most efficient manner.
Valuations
Stock prices of companies and balance sheets will be evaluated accordingly.
As reinsurance companies are already trading around book value – is the market predicting commoditization of reinsurance already?
Risk adjusted return metrics
Return over risk adjusted measure will be needed by analyst to evaluate insurers and reinsurers, similar to our article “what can insurance industry learn from baseball”.
Survival of the fittest
This idea will promote the free market capitalistic approach, especially with educated buyers and sellers of risk- no protectionism needed.
Survival of the fittest and true free markets in the insurance industry.
Questions
- Will this be best for customers?
- Is savings worth default or credit risk?
- When will this occur?
- Why would reinsurance intermediaries not move in this fashion?
- Will reinsurers fail more often or quicker?
