Buyers who can differentiate themselves may dodge harsher rate hikes: Arch’s buyer

As the reality of the hard market hits home, buyers will be keen to differentiate themselves from their peers as they attempt to negotiate the best deals possible with their reinsurers.

Those with a better performance will be in a better position to negotiate, Krista Bonneau, senior vice president, ceded reinsurance, Arch Insurance International, told Intelligent Insurer.

Bonneau stressed that, while it is clear that rates will increase, the extent across different lines remains to be seen. As such, buyers will be manoeuvring in an attempt to seek the best deals.

“Over the course of 2020 we have seen upward pressure in the reinsurance market,” she said.

“All the signs suggest that this is likely to continue but there is still uncertainty as to exactly what the market will look like at January 1, 2021.

“We are also seeing strong upward movement on the primary side of the business which will have a positive impact and create opportunity.

“With the transitioning market, cedants will look to differentiate themselves from their peers. Those who can clearly articulate their strategy, backed by supportive data and a proven track record, will be in the strongest position.

“It is important to start renewal discussions early and to establish clear objectives and understanding around net appetite.

“As with any renewal season, buyers will want to fully understand any changes in the terms and pricing being offered at renewal, compared against the expiring terms. It is important to communicate which factors are driving that change and how much of it is driven by characteristics of the underlying portfolio rather than general market dynamics.

“A clear understanding of this will be key to facilitating constructive renewal discussions and finalising placements.”

Stable counterparties
Bonneau believes the coronavirus pandemic has been a reminder to the industry of the variety and number of challenges that businesses can face but also the vital role that reinsurance can play as a risk management tool.

“The impact of this pandemic, and the related economic uncertainty, reinforce the importance of the financial stability of reinsurance counterparties. This has always been a key counterparty consideration for Arch,” she said.

“In terms of the value of reinsurance, the fundamental benefits remain relatively unchanged. Reinsurance continues to be an effective capital and performance management tool to help reduce volatility and protect against downside risk. This is essential at any stage of the market cycle.

“In addition to managing risk, reinsurance can also be a facilitator for growth. This is particularly pertinent at the moment given the current favourable market conditions.”

Bonneau’s job as the renewal approaches is to ensure the reinsurance programmes she manages are fully optimised. She said a central part of optimising the programme is by measuring structures against the key performance metrics which are central to the organisation’s overall objectives.

“By applying relevant metrics, we can assess the advantages and disadvantages of different structure options,” she explained.

Her team works closely with various functions across the organisation, such as underwriting, actuarial, and cat modelling.

“We use multiple datapoints to help to make our purchasing decisions as informed and considered as possible. This is an important process for every renewal season, regardless of what stage of the market cycle we are in.

“In the current market environment, we are seeing improved rates and terms and conditions across many classes in the direct side of the business. A key objective will be to ensure we have a robust, efficient reinsurance programme which helps to enable growth in key areas of opportunity.”

She notes that the COVID-19 crisis has altered the reinsurance market in some fundamental ways. As a people-orientated business with close relationships, reinsurance has had to make a considerable adjustment.

“The most obvious impact has been on the way in which we transact. Reinsurance has historically been a predominantly face-to-face business but has quickly transitioned to the virtual world, with more conference calls than we thought possible a year ago.

“While this is different from what we are used to, it hasn’t proved to be an obstacle to getting the work done,” Bonneau said.

“Aside from this, COVID-19 has accelerated an already hardening market. It has provided the industry with more ammunition to encourage necessary corrections in pricing and terms and conditions, on the direct and the reinsurance sides of the business.

“The market is in a state of flux. While this inevitably creates challenges it also generates opportunities whether entering new lines of business or expanding in existing lines.

“Reinsurance acts as an enabler in such an environment. The overall quality of the reinsurance programme we create during these upcoming renewals will positively impact our ability to maximise opportunities within the current market conditions,” she concluded.