Why buyers will seek reductions

Overcapacity should dictate a stable renewal and reinsurers should therefore remain mindful of the effect that steep rate hikes can have on smaller players in less developed markets, says Robert Easton of Matrix Insurance & Reinsurance Brokers.

Overcapacity will continue to scupper reinsurers’ hopes of rate increases as buyers play a long-term game as the market heads into the start of the renewal season at Monte Carlo and reinsurers declare their expectations for the renewals ahead of Baden-Baden, where the real negotiations invariably begin in earnest.

That is the view of Robert Easton, head of Treaty UK, Matrix Insurance & Reinsurance Brokers.

“Unfortunately for them (and serving as a counter to such expectations), reinsurers’ desire to firm up rates has been severely curtailed by an oversupply of capacity (both traditional and non-traditional) which has resulted in a prolonged soft market environment—one that didn’t even respond to a year which experienced losses that resulted in most reinsurers posting combined net loss ratios above the 100 percent level,” Easton says.

“With capacity in such abundance, the market will doubtless remain stuck in the doldrums, meaning that when reinsurers do try to talk up the market, they will ultimately end up having to concede at the final post when the reality of overcapacity dictates otherwise.”

He says that threatened rate rises of 20 to 30 percent during last year’s negotiations fell by the wayside and reinsurers readily renewed contracts at 1/1 that were offered with risk-adjusted flat pricing or, in some cases, even small reductions.

“Is it little wonder therefore that seasoned buyers of reinsurance have learned not to react to such threats but instead play the long game and take such threats in their stride?” he asks.

As such, Easton says, buyers will not be entering the upcoming renewals season with too much trepidation, but more likely with an expectation of a further softening of pricing.

Difficult times

He stresses that several territories in which Matrix operates have endured some difficult and at times turbulent operating conditions in recent years.

“For them, the soft market conditions have been a godsend and meant they have been better placed to manage their own domestic challenges without being too overburdened with unrealistic reinsurer expectations,” he says.

Easton says he is reminded of the phrase used in President Bill Clinton’s 1992 US election campaign: ‘It’s the economy, stupid’.

The quote is significant to Easton’s firm’s clients, which are primarily based in the eastern Mediterranean. He explains: “The local economy dictates the ability of any domestic insurer to successfully operate in its respective marketplace. It is in such territories that reinsurers need to be mindful that any sudden hardening of reinsurance rates would at best be very difficult to be absorbed and at worst, could prove catastrophic.

“There can be little doubt that there will come a time when a significant loss occurs in one of our territories, or that the mother of all losses occurs elsewhere. Post any such event our clients will no doubt share their burden of rate rises, but until such time, reinsurers really do need to remain calm, commercially minded and prepared to accept that pricing needs to be managed far more sensitively when it comes to territories where the local operating conditions remain so challenging.”

Easton says this is especially true when factoring in that the current vendor model outputs are at best questionable.

“This is why so many reinsurers ignore the results completely on the bottom and mid layers,” he says.

“The pricing of some of our territorial business can sometimes prove challenging for the more model-driven reinsurers, but perhaps they should recall that it was not so long ago that the rating agencies punished those reinsurers who had tried to focus their underwriting efforts solely on the technically higher margin business occurring elsewhere.

“With this in mind we believe that it is far better for reinsurers to embrace one of the oldest principles of reinsurance: to spread their risk and in so doing look far more favourably upon the many amazing clients which Matrix is so privileged to represent in our operating regions.”

Robert Easton is head of Treaty UK at Matrix Insurance & Reinsurance Brokers. He can be contacted at: robert.easton@matrix-brokers.com