Following an unconventional 1st January treaty renewal season, the big question on the lips of corporate buyers and their advisers is how much of this reinsurance cost reduction will insurers pass on to them?
A Favourable, Albeit Unconventional, Treaty Renewal Season
The 2013/4 year-end treaty renewal season was marked by overcapacity and a range of rate reductions on natural catastrophe excess of loss treaty reinsurance from 5% to 25%.
History, experience, and economic theory indicate that when reinsurance becomes cheaper, insurers buy more of it, often by lowering their retentions. Unusually this year, insurers have bought less reinsurance, which is principally because of more efficient use of capital and therefore greater risk retention.
This has been achieved through making greater use of data and analytics combining underwriting portfolios globally for given products (e.g. property) across geographies, across multiple products and years, as well as rationalising across a given portfolio the value of purchasing single risk facultative reinsurance.
Fortune Favours the Well Informed
Our analysis of H1 2014 shows that we have obtained a similar range of rate reductions to that experienced at year-end in the treaty reinsurance market.
Over the past few years carriers have become increasingly sophisticated in their analysis and modelling of their underwriting portfolios. Whilst corporate buyers are also making greater use of analytics, we think they are trailing behind carriers who continue to make profitable decisions based on a deeper understanding of risk pricing.
Corporate buyers can achieve substantially better-than-average pricing through:
- the provision of good underwriting data
- the use of analytics to drive pricing
- strong relationships with carriers
Multi-line and multi-year (MLMY) policies may not be viewed by seasoned market practitioners as innovation, but the quest for more efficient use of capital is leading to a resurgence of such policies in the treaty market.
We believe that innovation will also lead to MLMY policies re-emerging in the corporate market, as buyers seek to drive the same type of capital efficiencies that carriers are achieving.
Whilst there have been a number of natural catastrophes since the beginning of the year, none have had a significant financial impact on the global (re)insurance sector.
The outlook therefore remains very favourable for corporate buyers and more particularly for the well informed and well advised.
Guest blogger James Nicholson is Director of Broking, Construction, Property & Casualty (CPC), based in London. With the company since 2007, James is responsible for the broking / placement teams in Willis’ International Construction, Property & Casualty placing unit.