The partnership ideal is a mainstay of the reinsurance world, but it is slowly being eroded. Lars Erik Lundqvist calls for a return to the good old days

In the reinsurance market the spirit of partnership was once one of the pillars of confidence that existed between reinsurers and cedants.

This spirit is slowly being eroded by some of the last year's developments.

Four factors play a key role here:

  • Liquidations and closures of reinsurers
  • Lack of proportional capacity
  • Quicker pay-back requirements after losses
  • Shareholder focus.
  • The closure of large and reputable reinsurers over the last few years has rocked the confidence of the market.

    Several of these have gone due to foolish acquisitions to gain market share, lack of proper underwriting control and a failure to understand the worst case scenarios.

    Several smaller reinsurers - quite often owned by direct insurers - are leaving the market, where conditions are the best for years. This sad development is leading to an even more oligopolistic market, which is not in the best interest of cedants.

    Today, capacity for XL is readily available for programmes where price is considered adequate. This is quite acceptable for the larger cedants that have an option of retaining risk or reinsuring it. For smaller cedants, this development means a big problem for reinsurance managers.

    Proportional cover is the best sign of partnership. The erosion of partnership started with the introduction of event limits and continued with a reduction of any proportional capacity.

    From the point of view of reinsurers this is logical, as the profit margin is increasing and the possibility of controlling the exposure has improved. But this means that the burden is now on cedants. We now see increasing demands to totally exclude the catastrophe exposure from the proportional cover that is surviving.

    Pay-back for losses has traditionally always been built into renewals, but for the really large losses a period of seven to ten years was previously acceptable. After 11 September this is now down to three to five years. We have seen so many "100-year events" in the last few years that this concept is no longer really credible.

    This definitely puts an additional strain on cedants - particularly the smaller ones who cannot afford to increase retentions. With a more long-term commitment or partnership feeling this should not really be needed. To some extent cedants are also to blame as there are very few who will not go for the lowest possible deal on the market.

    Shareholder focus is brought up whenever you ask a chief executive of a reinsurance company about the first priority of the reinsurer.

    This is understandable, considering the huge amounts invested in the sector by pension funds and other investors the past two years. It is generally agreed that to be successful you need to have satisfied shareholders, customers and staff. However, as a vision for an entity, there is a strong risk you will get your focus wrong.

    In whatever activity they are in, successful companies will always need to focus on customer satisfaction. With that focus professionally managed you will get both happy shareholders and an enthusiastic staff. This does not always mean that customers will get the terms or price they like. To achieve this a much greater transparency is needed. This will foster the spirit of partnership.

    What is the risk for reinsurers of losing this spirit - or not being able to recover it?

  • Cedants will find other ways of covering their reinsurance needs. There are interesting alternatives in the financial markets today
  • Cedants will find ways of pooling their more attractive reinsurance programmes or going back to reciprocal deals with other cedants
  • Cedants will be even more willing to shop around creating a much higher acquisition cost for reinsurers
  • Cedants who can afford it will retain their more attractive and less volatile classes of business creating an even more difficult situation for reinsurers in building a stable portfolio
  • Cedants who can not access any of these alternatives may be driven into mergers with others, reducing the available market even further.
  • Lars Erik Lundqvist is senior vice president of ICMIF Reinsurance Services