Through thick and thin

Miguel Martinez-Alvarez from Liberty Mutual Re outlines what cedents should look for in a reinsurance partner, asserting financial strength isn’t everything

We’ve long argued that assessing a potential reinsurance partner based on their credit rating is both understandable, and insufficient. While ratings as an independent assessment of financial stability are important, experience tells us they cannot always reflect the full picture, particularly when systemic risk causes widespread market disruption. In a year like 2020, it’s vital for cedents to focus on the strategic fit of their reinsurance partner.

Making an informed choice about reinsurers requires assessing not just the financials, but also determining how well a reinsurer matches up to cedents’ various needs. It’s most evident in times of crisis whether partners can keep their promises of a long-term and constructive business relationship.

This is especially true at the point of a claim where a constructive and objective exchange of information is a basic prerequisite.

The key risks driving reinsurance purchasing

There has been much talk of how the (re)insurance industry should respond to evolving risks such as terrorism and cyber, and now pandemics. But even as the scale of losses from emerging threats increases, and estimates of Covid-related losses are debated, the biggest risk for insurers worldwide remains natural catastrophes.

In 2019, economic losses from natural disasters topped $232bn, down from the prior two years which were the costliest back-to-back years on record. The total cost of natural disasters in the decade, also the costliest on record, was $2.98trn, over a trillion more than the previous decade.

Matching the problem and solution

Historically, for larger insurers, the motivation for buying reinsurance has been earnings protection and volatility reduction. As Covid-19 claims materialise and rates harden, many mid-sized cedents may buy reinsurance protection to shore up balance sheets, maintain their ratings, or position themselves for growth. 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 may be looking for capital support, know-how and product development insights, particularly where they are seeking growth through new products or expansion in developing markets.

Choose a reinsurance partner 

In the current market, there are additional considerations. How exposed is a reinsurer through the classes of business they write? How stable is their risk appetite; might they withdraw from lines of business, geographies or industry sectors? Perhaps they’re vulnerable to a takeover, potentially causing disruption to current relationships.

Service also comes under the spotlight: as firms sell legacy books to release capital, how can they guarantee the claims service they initially sold? Are underwriters accessible when the pressure’s on? How supportive are they, when support is needed?

We know various factors drive reinsurer choice, from underwriting policy and risk mitigation, through to direct insurance expertise, global footprint, people, flexibility and specialist cover. But, in our view, another key consideration should be structure. A global reinsurance partner needs to provide consistency and stability.

There can be little doubt that in a market where catastrophes are rising and insured values are increasing, it pays to assess broadly the strength of reinsurers. No single measure – ratings, structure, specialism or footprint – is enough. A reinsurer has to score highly across every area if they are to be a valued partner through thick and thin.