A message for the rating agencies
One of the key elements of the rating process is ‘competitive position’, which for reinsurers refers to their ability to attract and retain business in a tough market place. The rating agencies understandably tend to believe that ‘pricing power’ is vital to this process, and they often translate this into the ability the reinsurer has to lead business. That’s commonly simplified into the amount of business they actually lead.
For anybody not working in reinsurance, it’s not difficult to follow this logic – if you’re viewed as a leader, you will be offered business, you’re ‘in control of your own destiny’ (an important concept for ratings) and that must surely give you a competitive advantage.
As a veteran of 20 years’ working in the reinsurance markets, before I started working in the ratings world, this has always frustrated me, especially when I think of the smaller reinsurers. OK, so it’s clearly important for the ‘big boys’, but it seems to me that it’s a positive disadvantage for smaller players. The big boys have their feet in most, if not all, markets – they rely on that diversification to give them stability, and leading business is part and parcel of their market presence. But if I was a smaller player I’d want to play a different game – in fact I most certainly wouldn’t want to do it like the big boys.
I’d want to be nimble and selective; looking at the changing landscape and finding the bits that I can work to my favour, avoiding the ones that just don’t add up. The key to that is ‘the changing landscape’ – some markets, countries, sectors, cedants, programmes/layers are good from a reinsurer’s perspective sometimes and not so good at others.
Being a ‘leader’ comes with a number of responsibilities – yes, setting the price and having an influential role in the structure, but it also comes with some additional costs in the servicing of the business. And it also comes with an expectation that you’re going to do your best to hang around – maybe not to the thinnest end of the ‘thick and thin’, but certainly to ‘not so thick’ and even to ‘getting rather thin’.
I would also question whether leaders really set the price these days, or whether they get pulled down to the consensus price that suits the panel of reinsurers the client wants on the placement. Is the leader really in control?
As a follower, on the other hand, you can ‘duck and dive’ a bit more – it’s easier to quit business, shift from one account to another (even with the same client), from one sector to another and even from one country to another. So you can set your own price, and if the deal’s too far away, move your capacity elsewhere. Yes, there’s a degree of ‘stickiness’ around relationships, but ultimately you have a lot more freedom to pick and choose.
So for me, the characteristics that a smaller reinsurer should possess are –
- The ability to price properly
- The ability to attract and retain business, which requires strengths such as –
- A well respected team with strong track records in the markets
- Strong relationships with brokers and cedants
- An approach to client relationships designed to attract and build these relationships, which may include:
- Speedy response to client offers (pricing quickly, offering capacity by return)
- Rapid processing and payment of claims
- An important role in key areas – for example a strong presence in a region or niche of business. Your may have less than 1% of the reinsurance market, but if you’ve got 15% in a given specialism/market, then you absolutely have control over your destiny.
- Management with a proven record
- A robust approach to cycle management and a clear approach to managing volatility.
In addition, it can help to have an ownership that understands what being a reinsurer involves.
Underlying all of this should be well managed risk management processes and a suitable level of capital. From a ratings perspective it also helps to have good MI providing underlying data and proof that the above are really working.
In my reinsurance days, I worked for one particular very large company and another that was much smaller. The most immediate lesson I learned in moving from one to another is that, generally, large insurers prefer to work with large partners, and smaller insurers with smaller partners. I also had a colleague who used to say that ‘prestige clients can be defined as business that you can be sure you will lose money on’; I would contend that having clients who are smaller, less prestige, and more in need of your help can perhaps be preferable to being the reinsurer of a prestige insurer.
It’s interesting in life how much human nature plays a part in who we do business with, but I do believe that smaller reinsurers can have just as robust businesses as their massive competitors, and that they don’t need to be the leader on a piece of business to be able to have a say in the pricing or structure.
So I call on my old colleagues in the rating agencies to start thinking differently about the role that small reinsurers can play in the market, and give them recognition for being well managed, agile followers rather than leaden leaders.