Insurance carriers are not sitting around looking forward to lower-priced reinsurance contracts on their Jan. 1, 2014 renewals. For some, the renewal negotiations are done. Others are locking in favorable prices for multiyear terms, brokers told Carrier Management at the PCI conference in Boston last month.
“Actually, there are some programs that have already been completed for January 1. People went to the market early,” reports Mike Schnur, a partner with TigerRisk Partners.
Greg Schiffer, chief property underwriter for Swiss Re in North America, confirms the PCI rumor about early renewal completions. “I have to say that some companies are exploring that. It’s a trend,” Schiffer says.
“I think it’s a result of where we are right now in the market,” he says, explaining that the alternative capacity coming into the market has had its influence—”putting some pressure on the supply‑demand dynamics.”
“Insurance companies are hedging their bets a bit, buying some protection early [and] maybe buying some later on as well,” Schiffer adds.
Schnur agrees that carriers are not necessarily completing all their programs now. “Some are hedging at this point, maybe completing 50 percent and saving the other 50 percent for another month or two from now.
“If you believe that the market has some softness to it, why not lock it in now in case there’s a natural catastrophe between now and year-end that could potentially impact rates?” he asks.
But what if no catastrophe occurs to fuel a hike in reinsurance prices? Is it the right move to lock the reinsurance programs down now when prices could fall even more?
“Absolutely,” Schnur responds. “Anytime you can hedge a buy, it’s a good idea,” he counsels, describing any further potential price slide as minimal. “I think what’s happening now you’ll see much throughout the remainder of the year as well.”
Schnur says TigerRisk’s clients, who are large buyers of reinsurance, saw midyear declines of as much as 20 percent. “Our feeling is that January 1 will probably be 10 to 15‑ish,” he says.
Phil Campbell, executive vice president for BMS Group in Minneapolis, notes that activities beyond price drops typify a softening marketplace, pointing to more flexible terms and conditions. In particular, Campbell reports that some of the more significant changes this year relate to extensions of contract periods to multiyear terms.
“We haven’t seen multiyear contracts be a product that reinsurers have wanted to offer in the past. I don’t think it’s a product that they actually want to offer.” But Campbell says it’s a product that reinsurers now simply cannot afford to avoid selling anymore.
“In order for them to remain relevant in the eyes of the buyer, they have to come up with different types of ways to sell their current products.
“One of the things that reinsurers have historically championed is a long‑term relationship with their buyers.” If they are committed to buyer relationships, then “there’s nothing more poignant about demonstrating that than to engage in a multiyear contract,” he says.
“In the past, there would have been specific types of contracts that might have gone on for a multiyear basis, but today you can find a much wider variety of contract types—where a reinsurer will engage you in discussion to do that contract on a two- or three‑year basis.”
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Key drivers stimulating reinsurers to provide traditional products on a multiyear basis include the desire to retain relationships with key customers and the pressures they feel from alternative reinsurance capital snatching premium volume from the traditional reinsurance market, Campbell says.
“Locking up that relationship with a key client, with a traditional product at a mutually acceptable price, is one way for reinsurers to maintain the continuity of that premium volume and also the continuity of that client relationship,” he says.
“I don’t think the nature of the underlying business will be a strong determination as to whether or not a reinsurer agrees or doesn’t agree to do the multiyear deal,” he says, noting they are possible for both property and casualty contracts. “It will come down more to price and the comfort level the reinsurer and the buyer have with one another” than product line.
When did reinsurers start down the road of offering multiyear covers?
“We were visiting some of our London partners back in the first quarter, and we broached the topic,” Campbell reports. “‘We’re always talking about a longer‑term relationship. Why don’t we actually make it a contractual long‑term relationship?'” the broker asked.
“We were pleasantly surprised at the reaction that we got from the reinsurers, [and] it really snowballed after that. More discussions occurred after Q1 into Q2. By the summer, we were having a tremendous number of negotiations and discussions with both buyers and reinsurers about the concept.”
“I think it’s something that, both at NAMIC and now at PCI, the industry has come to focus on,” he says, referring to the Boston annual meeting of the Property Casualty Insurers Association of America and the annual meeting of the National Association of Mutual Insurance Companies, which was held in Seattle in September.
Schnur sees carriers changing their reinsurance programs in a different way. “There is seemingly an interest by buyers looking for protection for multiple towers at one time. As opposed to buying very, very specific reinsurance, we’re starting to see an interest combining coverages,” he says.
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“There’s an efficiency to buying maybe a potential property/casualty cover, or rather than buying two different type of cat programs, combining them and making one cat cover—whether it’s region‑specific or buying on a more global basis,” Schnur says.
Campbell agrees but says he has seen that particular trend evolving over a longer time frame.
“There is, and has been for a number of years, a tendency for reinsurance buyers, who historically looked at buying reinsurance on a product‑by‑product or silo‑by‑silo type basis, to ask themselves if it’s not more efficient to collapse some of those individual purchases, individual silos, into one larger silo and to see if they can achieve some efficiencies as a result of that,” Campbell says.
“This has been an evolution over the last decade….If you go back 10 or 15 years ago and you saw a schematic of someone’s reinsurance program, there would’ve been many silos on that schematic. Today, that schematic would be much simpler,” Campbell says.
As for other structural changes, Schnur reports that customers are increasingly talking about using some of the reinsurance premium savings they’re accumulating to buy more limit.
Campbell, on the other hand, says that the tendency of carriers to increase retentions in recent years is likely to continue—reversing the historical trend of past decades that would have seen buyers take advantage of soft pricing to lower their retentions.
“The simple reality” is that insurers and reinsurers have enjoyed some pretty nice returns in recent years. “That means the primary buyers [are] in a much better financial position than they ever were before. As a result, they are simply asking themselves the question: ‘Am I better off with strong rate adequacy…keeping more of my own business rather than sending it to a third‑party reinsurer?’
“That is one of the major challenges reinsurers have,” Campbell concludes, adding that this is another reason for reinsurers to incentivize buyers with multiyear contracts.
Although all the broker representatives who spoke to Carrier Management at PCI predicted that reinsurance rates would be lower on Jan. 1, 2014 than Jan. 1, 2013, Frank Harrison, chief executive officer of Holborn, noted that lower reinsurance rates won’t necessarily translate into lower overall premium dollars going to reinsurers.
“There was conventional thinking that at year-end there would be a catch-up to the midyear,” Harrison says, noting that rates fell by 20 percent or more at midyear. As people digested the data, however, they realized that subject premiums are up. On average, carriers are getting more rate for the products they sell, and their policy counts are also increasing. So even as reinsurance rates decline, the actual dollars to the reinsurers may not be substantially different year over year, he explains.
Harrison and the other brokers noted that the largest of the significant reinsurance rate drops that occurred midyear were on coastally exposed accounts in Florida and along the Gulf Coast, “where the margins were pretty significant.”
“We saw rates come off, in some cases by 20 percent or more, on some of these risks,” Harrison says.
Noting that the vast majority of the accounts that renew at Jan. 1 do not have the same basic margins embedded in them, Harrison says that 20‑plus‑percent rate decreases are unlikely. “Could we see 10 percent? Sure. Twelve on some, 5 on others. It really gets down to the merits of the individual account,” he says.
Campbell likewise says price changes “are going to vary almost company by company, principally based on both exposure and loss experience.” For a Jan. 1 renewal with flat exposures year over year and results within an expected range of tolerance, Campbell foresees rate decreases that could be anywhere in a range of 5-15 percent.
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