20 August 2014
AM Best came out today with a revision for the reinsurance sector from stable to negative as the reinsurance market continues to soften. When it comes to reinsurance, it’s been a buyers’ market. Competition in the global reinsurance industry is fierce as there is significant excess capacity. Reinsurers have experienced lower than anticipated cat losses despite some well publicized events earlier in the year. There’s also been robust use of alternative capital as cat bonds continue to increase. What this means for carriers is that they have opportunities to take advantage of falling prices and get improved coverage across all lines of business. In addition to low prices, terms and conditions are improving. Carriers are able to purchase increased coverage because of the low prices and lock in multi-year deals for portions of their reinsurance coverage. They’re negotiating more customized reinsurance programs – lasering out specific exposures. And even property cat renewals are getting improved prices and terms. With pressures on growth, carriers who retreated from catastrophe exposed coastal areas in earlier years are reassessing the potential opportunities and looking for tools to help them re-enter a potential growth market. The question is how long can reinsurers keep this up? Is the bottom of the soft market emerging? Private reinsurance capital is now competing at a level comparable to current government roles in some areas. AM Best isn’t the only rating agency that is posting negative outlooks on the reinsurance market. Primary carriers are starting to look more aggressively to determine if they should consider locking in lower rates and favorable terms for longer periods. Especially as reinsurance becomes even more of a strategic decision since regulators are increasing their use of economic capital modelling. Many carriers find rating agency capital requirements are driving a higher capital constraint and therefore are becoming a leading factor in strategic decisions about how insurers manage capital and make reinsurance decisions. But reinsurance is a unique area in an insurance carrier typically managed by a small unit with one or two gurus who have the knowledge of the programs preserved in their heads. Although reinsurance programs are becoming increasingly complex, large numbers of carriers rely on excel spreadsheets to manage these programs which are rife for error. As carriers structure more complex programs because prices and terms are favorable, we’re seeing increased interest in reinsurance software to help manage these complex programs. Modeling potential programs, automating premium and commission calculations, processing complex inurements and improving claims recoveries are helping many find huge returns when investing in these types of systems.