While it might take an innovative clash cover to lure Chubb’s reinsurance buyer back into the casualty reinsurance market, other cedents are enticed by higher ceding commissions and multiline and multiyear deals, experts said recently.
Mark James, the global reinsurance manager of Chubb, revealed that he cancelled a big casualty reinsurance treaty last July, and admitted that those higher ceding commissions also have him thinking about buying casualty reinsurance coverage again.
But there are coverage offerings that are more likely to draw non-buyers like Chubb back, he said during a session of the Casualty Actuarial Society’s Seminar on Reinsurance earlier this year.
“As a large stock company, aggregate covers, multiline covers, clash covers that have come and gone out of the market—these are things that are more interesting than not,” James said, responding to a question from panel moderator Brian Ingle, vice president of Willis Re, about the types of casualty reinsurance structures ceding carriers want.
“These are the big problems that stock companies have that don’t lend themselves to easy solutions. So products built around these complexities and the interactions of different casualty lines” have appeal, James said, adding terrorism reinsurance covers with workers compensation to his wishlist.
Giving a specific example of a potentially enticing reinsurance cover, James suggested clash coverage for cyber and directors and officers liability.
“Target has already announced that their D&O tower getting hammered, [and] obviously their cyber tower is getting hammered. So I think there’s a real need for companies that write both of those lines to buy some sort of clash protection,” James suggested.
“I really see that as a potential area that could be very surprising for a lot of companies,” he said, drawing a parallel to the surge of fiduciary liability follow-on suits tagged along with D&O suits (also known as ERISA tagalong suits) to the surge of D&O suits in the years following the Enron and Worldcom meltdowns in the early 2000s.
Those “were huge challenges for big ceding companies because they had big limits up on both towers and suddenly you had this clash event,” James said, noting that while Chubb fortunately had a clash product in place at the time, he looks forward to a cyber-type clash product.
“If you’re thinking about something that’s useful to a big stock company, that’s absolutely the type of product we need to be thinking about—and I think brokers and reinsurers need to be thinking about how to model it, predict it, price it [and] offer it,” he said.
Rob Barnett, senior vice president for Munich Re America’s casualty lines national accounts division, confirmed that reinsurance companies are indeed thinking about new offerings. “Working for one of the [reinsurance] companies that’s been around for a long time, the whole idea of innovation and not resting on your laurels is very is one of the front-page snippets that we hear repetitively.”
“We need to come up with new ideas, build a better mousetrap to help out the ceding companies” and give them reasons to buy reinsurance, “whether it be aggregation features, AADs [aggregate annual deductibles], increased terrorism coverage,” he said. “Being proactive vs. being reactive is really what it comes down to,” Barnett said.
Ingle opened the session noting that only 10 percent of casualty primary insurance premium is currently ceded to reinsurers. The figured declined steadily from 17 percent in 2000, dropping to 10 percent by around 2006 and holding in that range ever since, he reported.
“We are certainly one of the companies that would have driven that trend over the last 10 years of taking a lot of premium out of the market,” James said of Chubb. “More recently, although we continue to be a big net retainer of our casualty lines of business, there are some compelling trends of which I think even large cedents have to take note.
“One is those would just be that ceding commissions are rising across the board, and are starting to change the economics of deals that heretofore we would have dismissed outright.”
James also said that for the casualty placements that Chubb still does have in the market—”and there are several meaningful ones”—he is starting to see terms and conditions, as well as caps on the treaties, expand to more meaningful levels.
“As a large buyer, being ability to cede volatility into the market really has a lot of value. So placing that business makes sense from a buy vs. non-buy standpoint.”
Terms Expand
“We continue to be surprised by the terms and conditions that we’re seeing on the casualty treaties,” said Will Garland, a managing director for Guy Carpenter, who reported that expanded terms on casualty treaties started to emerge last fall, and that the changes are drawing interest from buyers.
“We’re starting to see some interest from larger stock companies purchasing in areas where they hadn’t purchased for a number of years,” said Garland. “We’re [also] seeing some of our smaller clients looking to buy more within layers.
Other important trends are treaties with combined lines of business put together and multiyear deals, he said.
“It’s very much up in the air right now as to how far the market goes,” he said. “But it’s definitely been a crazy 12 months, and I definitely see that continuing,” Garland said.
“Going into 2014 and beyond, we have been pleasantly surprised by increased demand within the casualty market on placements,” he said, highlighting the increasing popularity of treaties that combine multiple lines and the multiyear deals, in particular. By “buying en masse” instead of through separate distinct reinsurance treaties, cedents look to “leverage their sizable of portfolios” for pricing efficiencies.
“If they’re buying four different treaties with 40, 60 or 80 million dollars of premium, they look it and say put them together and try to leverage better economies.”
With the multiyear deals, ceding companies can lock in the reinsurance for a period of years, which helps them with their planning and budgeting process, he said, noting that Guy Carpenter is also seeing more interest in “aggregate-type products to transfer volatility” as well
James agreed. “We’re comfortable keeping the expected volatility and frequently employ AADs within our casualty structure,” he said. “That’s how we have been buying a lot of [this] over the last four or five years,” he said.
Summing up, Garland said: “Going forward, and certainly from Jan. 1 to June 1, we have been very surprised by the increased orders we’ve got on layers—companies looking to buy more limit. It’s been a very good time in terms of more classic buyers [coming back] into the market, and I definitely see the trend continuing.”
As to patterns of buying excess-of-loss coverage or quota shares, Garland said he expects historical patterns to continue for the most part—with larger stock companies buying excess of loss and smaller non-stocks using quota shares. But “as ceding commissions increase, we are seeing a lot of companies ask, ‘Can we get a quota with X percent ceding commission,'” he reported.
“Obviously no two books are created equal which is a challenge,” he said. “But that quota-share angle is being pursued more by a lot of companies, and quite honestly, in some cases, even the large stock companies that see a positive trade on the quota shares,” Garland said.
Primary vs. Reinsurance Pricing Disconnect
On the pricing front, Barnett said it’s a “tale of two markets.” Primary insurers are starting to see rates sink down to the 0-5 percent range on large accounts—with variations by line—but they’re still seeing increases, he said. For the reinsurance market, in contrast, it is “pretty much decreases across the board—for all lines of business frankly,” the reinsurance company representative said.
Casualty reinsurance pricing pressure started last year in the June-July timeframe, Barnett reported.
James also confirmed “the disconnect” between primary and reinsurance pricing. “We’re still in some cases getting price increases on some casualty lines of business, and you’re also seeing a competitive reinsurance landscape. So between those two, we’re certainly revisiting a lot of things that we haven’t revisited in five years,” he said, referring to casualty reinsurance purchases.
“From our perspective, it [casualty reinsurance] had become a less useful product looking back over the last five to 10 years. It may be entering the realm where it is a more useful product.”
Like Barnett, Guy Carpenter’s Garland said softness permeates the casualty reinsurance market at this point. “There are really no flat segments right now. I think everything’s soft. It’s just a scale of how soft,” the broker said.
He did offer a few limited exceptions—”certain lines like FI [financial institutions], where you’ll always have a natural hesitancy [from reinsurers] just given the volatility associated with that and systemic events,” as well as energy and rail. “You remove those pockets and the market in general is soft. It’s just a matter of where is on the scale from being very soft to moderately soft.”
James predicted that primary-reinsurance pricing disconnect will continue. With investment income continuing to fall quarterly—and fairly predictably as old investments mature—large primary writers are in unison in seeking rate hikes. “That’s been the big push, and I think it’s been sustained in the insurance market. ACE, Travelers, everyone is preaching from the same songbook here.”
With primary companies still getting positive rate increases, “we’re still halfway to go until we get to the bottom—until that’s going negative to zero” for the insurance market, Barnett said. On the reinsurance side, “ceding commissions on pro-rata treaties are at [an] inflection point. That’s why you’re seeing a lot of multiyear deals because reinsurers think that it’s lock in now while we can because the market is going to continue to go down on the reinsurance side.”
Ingle posed a direct question to Garland based on the trends being discussed. “The primary market is relatively hard; the rates are going up. And primary companies are looking at great ceding commission and override? Does that mean that reinsurers are pricing themselves into a loss out of the gates?”
“Part of me wants to say no, absolutely not,” the broker responded.
“We all hear the news that X company got a 35 [percent] ceding commission, and then suddenly everyone raises their hand and says we want that too. But you have to look at the size of the portfolio, you have to look at the historical results—what’s the track record been. It’s difficult because no two books are alike.
“It’s really a function of the underlying portfolio,” Garland said.
“In some cases, you look at the trades that are made on those ceding commissions and [you can conclude] it’s a win for all parties, given the underlying performance of that portfolio. [But] the challenge for reinsurers, and for us in talking to our clients on portfolios where the results haven’t been that good, is how to manage that.
“No two books are alike and not everyone can have a 35 or whatever ceding commission. You’ve got to look at it on a deal-by-deal basis.
Distinguishing Reinsurers: Are There Factors Beyond Price?
Highlighting the significant amount of reinsurance capacity available for those primary carriers that want to buy casualty reinsurance, Ingle asked whether clients are distinguishing between reinsurers based on their financial strength ratings.
“It’s pretty much a binary routine. These [reinsurance] companies are approved; these are not. If they’re approved, they’re looked at the same way as all the markets. There is no differentiation. Pricing is provided by the reinsurers and they look at them all equally,” Garland said.
“Sometimes in the signing process, they’ll look at the strength of the reinsurer determining how much of the line size they’ll allocate,” he added.
James said that Chubb has a high standard and only cedes casualty business to reinsurers with at least A+ Standard & Poor’s ratings. “We have a $50 billion balance sheet [and] we’re ceding to companies with balance sheets that generally are smaller,” he said, explaining why not only rating and the claims paying ability, but also “willingness to pay” are reinsurer characteristics that Chubb spends a lot of time thinking about.
“We purposefully narrow our pool, but once you’re in that pool, I agree [that] you get your pricing and you start to figure out what the market-clearing terms will be,” he said, confirming Garland’s assessment.
Giving a reinsurer’s perspective, Barnett suggested that innovation is the only clear way for reinsurers to differentiate themselves in the current market where even superior knowledge doesn’t move ceding companies. “We pride ourselves on technical expertise. Nobody is going to pay for that,” he said.
“As much as we’re willing to offer, I don’t think there’s a price we can put on the table. Nobody is willing to pay more because we know more about a certain subject.”
Instead Munich Re America is trying to create products—using existing products as a foundation for new ones, he said, giving the example of an auto carve-out product for umbrella as one that the company has had some success with. (See related article: Munich Re’s Auto Carve-Out)
The uncertainty around terrorism also presents an opportunity for reinsurers to expand coverage into some areas that they may not have in the past, Barnett said.