Identifying attractive buyers based on performance

Reinsurers may think they know what the perfect client looks like but they might not always be correct. Stuart Shipperlee, managing director of Litmus Analysis, explains the perspective offered by the results of the consultancy’s analysis of Asia-Pacific cedants.

When entering a new market, or looking to expand, how best can a reinsurer or broker identify and assess potentially receptive and attractive new clients?

Intuitively, companies with strong underwriting performance should be attractive as prospective clients for a proportional cover, while simultaneously being less receptive to the opportunity to share that performance.

However, that reluctance might well be overcome if their financial profile could benefit from more reinsurer support; for example, either due to relatively weak capital ratios, underwriting volatility or rapid growth.

For unrated carriers one way to look at this is via the LitmusQ financial score. Among other things these scores reflect capital ratio strength, absolute profitability, underwriting volatility, growth and size.

For Figure 1 we analysed unrated property/casualty insurers in China, Japan and South East Asia, selecting the 25 largest non-captive insurers that were neither affiliated with other larger, and rated, companies nor otherwise ‘sponsored’ by entities with significant capital resources.

Performance vs strength
We focused on the five-year average combined ratio as our performance metric (x-axis) and the company’s LitmusQ financial score as an indicator of financial strength and market position (y-axis). The size of the ‘bubble’ marking each company data point represents the relative scale of its reinsurance spend ranging between 0 percent and 74 percent of gross premium written.

Those companies positioned on or above the x-axis achieve a LitmusQ financial score that we map to ‘bbb-’ level or above, with the financial score improving the higher up the axis one goes. Companies positioned to the left of the y-axis have on average been making underwriting losses, with underwriting performance improving the further to the right one moves along the x-axis.

The point at which the axes intersect marks a combined ratio of 100 percent pure ‘break-even’ underwriting and a LitmusQ financial score of 52 (which we map to the ‘bbb-’ level).

The most obviously attractive clients for treaty reinsurers, who would also logically be most receptive to buying more cover, would seem to be those that are producing strong underwriting results but whose LitmusQ financial score is relatively low especially if they currently cede only a limited percentage of their gross premium volume.

For these companies, increasing their proportion of ceded premiums could potentially lead to an improvement in capital metrics, and/or reduce underwriting volatility, while the ability to write larger tickets with key clients could also improve their influence and market position.

However, those companies whose underwriting performance tends towards break-even or slightly worse and whose financial score we map to around the ‘bbb-’ level those clustered around the intersection of the x- and y-axes may also benefit from the performance uplift and/or capital protection that an appropriately structured, or re-structured, reinsurance programme might provide.

There is, of course, much more to the profiling of potential cedants than purely financial strength and underwriting performance, but these represent two valuable means of identifying potentially receptive targets for that first conversation.