As the risk environment becomes more testing, so reinsurance options in terms of carriers, products and capital markets solutions, are proliferating. So what should cedents look for to ensure they have the right kind of partner behind them, whatever the weather? Miguel Martinez-Alvarez, Head of Business Development, Liberty Mutual Re has the answer.
Assessing the suitability of a potential reinsurance partner is a significant strategic decision. The appeal of relying on a credit rating is that it’s an independent assessment of financial stability.
But while ratings play a key part in assessing financial strength, tests have shown they cannot always reflect the full picture, particularly when external events such as the collapse of a major business like Enron, or simply a major nat cat cluster, cause widespread market disruption.
Making an informed choice about reinsurance requires assessing not just the financials, but also determining how well a reinsurer matches up to cedents’ many and varied needs.
What are the key risks driving reinsurance purchasing?
There is much talk about how the (re)insurance industry should respond to new risks. But even as the scale of losses (notably cyber) increases , the biggest risk for insurers worldwide remains natural catastrophes – and by a significant margin. In 2017, 96 million people were affected by natural disasters which now costs the global economy an estimated $520bn annually. The combination of rising valuations, more man-made catastrophes and more frequent and severe climate-related catastrophes is without doubt one of the biggest challenges facing the global economy and the (re)insurance industry.
Does size matter?
Historically, for larger insurers, the motivation for buying reinsurance has been earnings protection and volatility reduction. Softer pricing and more competition have yet to shift that picture. But is change coming as many of the insurers that initially categorised losses from HIM as an earnings event find they need to increase reserves? Many mid-sized cedents require a higher level of support in order to satisfy solvency requirements and to maintain ratings in the face of significant events. For these businesses, reinsurance is a more flexible and easier solution than going to the capital markets for an ILS (which is often specific in scope) or the more traditional alternatives of issuing stock or bonds that increase the capital base but also the cost of capital.
Smaller clients by contrast are not just looking for capital support, but also for know-how and product development insights, particularly where they are seeking to drive growth through a new portfolio of products or expansion in developing markets.
How should cedents choose a reinsurance partner?
We know there is a range of factors that drives reinsurer choice, from underwriting policy and risk mitigation, through to direct insurance expertise, global footprint, people, flexibility and of course specialist cover. But, in our view, another key consideration should be structure. As the name suggests, Liberty Mutual Re began life as a mutual, with all the reassurance that offers in terms of stability and security. There can be little doubt that in a market where catastrophes are on the rise and insured values are increasing, it pays to assess the strength of reinsurance partners in the round. No one measure in isolation – ratings, structure, specialism or footprint – is enough. A reinsurer has to score highly across every area if they are to be a partner that is truly fit for the futu