By Kerri Hamm | Head of Business Development, Munich Reinsurance America, Inc. (“Munich Re US”)
Adverse property and casualty losses over the past few years have led to capacity challenges and hard conversations between cedents and reinsurers during the recent renewal cycles. While no one looks forward to higher prices and higher retentions for risk transfer, those shifts have been necessary due to an exceptionally challenging risk environment, inclusive of climatological, legal, economic, and social uncertainties. “Out of adversity comes opportunity” is applicable in this case, particularly as cedents and reinsurers leverage this difficult moment to forge closer partnerships.
Both reinsurers and ceding companies need the ability to make adequate returns on their deployed capital; otherwise, they cannot continue to assume risk. That means each must take risk and underwriting seriously, and work together to achieve a healthy, equitable trading relationship. As the marketplace for reinsurance tightened because some reinsurers and capital providers could not find sustainable returns on capital, a flight to quality on both sides has occurred. Cedents are looking for reinsurance partners with strong balance sheets that can weather literal and figurative storms, and offer a stable and sustainable partnership. Meanwhile, reinsurers are looking for partners who are prepared to prioritize the bottom line and who value the capital and expertise that they provide.
What has changed in reinsurance – and what hasn’t
When market conditions change, people sometimes forget traditional reinsurance practices do not. What has changed in reinsurance is vastly outweighed by what has not changed. Shifts during recent renewals include reinsurers asking for adjustments to terms and conditions and pricing that will allow for a return to sustainable risk taking. Some examples including increasing attachment points to match increased valuations, moving away from multiyear or complex structuring, and clearer loss occurrence definitions.
What has not changed in reinsurance? For Munich Re US, those elements include:
- Long-term commitment to the marketplace
- Intelligent risk taking and the ability to deploy significant capacity when terms allow for a win/win outcome
- Staying on top of trends, developing a deep understanding of risk, and responding to complex and changing conditions
- A focus on resilience and sustainability through portfolio diversification and financial strength
- A deep love of our business and a desire to share our expertise with our business partners
- Maximizing the value of reinsurance
Maximizing the value of reinsurance
The core of our business is taking risk. As insurers look for growth opportunities, they may be taking on more risk than they intend by increasing their top line. Ceding companies can maximize the value of their reinsurance program by asking their reinsurance partners, “How can you help me increase my top line but manage risk to a tolerable level?” Munich Re US is investing in tools and knowledge to help our clients become smarter risk-takers. We want to transfer our knowledge and assist our clients in selecting the best risks; thereby helping them achieve growth that is sustainable over time.
Some examples of knowledge transfer that can help cedents maximize the value of their reinsurance include:
Transparency, openness and clarity during the quote process. Sharing high-quality portfolio information with reinsurance partners is important for obtaining the best terms and pricing possible during a renewal. Cedents can ask for feedback from their reinsurers during the renewal process or during an annual review. This creates a healthy dialogue and risk sharing partnership.
Exposure management. The ability to understand aggregate exposures with real-time or digital tools is particularly helpful for both cedents and their reinsurers. Discussing this data “off- cycle” is another way to create healthy dialogue around risk sharing between cedents and reinsurers.
Reinsurance community expertise. Ceding insurance companies have an extensive set of resources in the reinsurance industry at their fingertips. Munich Re US has expertise in identifying risk trends. Cedents should ask, “What is the reinsurance community seeing that we aren’t? What risks should we be paying closer attention to?” Reinsurers who are interested in long-term risk sharing partnerships are typically quite open about the answers to those questions.
Cedents should ask, 'What is the reinsurance community seeing that we aren’t? What risks should we be paying closer attention to?'
Insurance is and always will be a “people” business. Collaborative and equitable risk-sharing relationships are a key factor in ensuring a sustainable reinsurance market. When partners approach challenges together, they can address difficult risks and find opportunities to overcome adversity.
This originally appeared on Business Insurance Risk Perspectives.