Transacting outside of traditional renewal cycle could favour reinsurers

by Artemis on June 9, 2016

The current softening and competitive nature of the reinsurance landscape sees companies fighting for a seemingly shrinking share of business during renewals, suggesting that it might be wise to seek deal completion outside of the traditional renewal cycle.

The January, April, and mid-year renewals are generally when the majority of reinsurance and insurance-linked securities (ILS) agreements are finalised, typically annual, or multi-year contracts that are subsequently renewed during the same part of the renewal cycle as the original transaction.

However, with competition from both traditional and increasingly alternative reinsurance capital providers intense, driven by expansion of the ILS sector, the sustained period of benign large losses, and ultimately substantially reduced rates, the traditional reinsurance renewal cycle might not be the best time for firms to secure business.

Artemis discussed more than a year ago that following the traditional reinsurance renewal cycle could be detrimental to the growth of ILS, and now, with market headwinds persisting and even intensifying in some areas it’s apparent that reinsurers could also benefit from seeking deal completion outside of the renewal cycle.

The growth and maturity of the ILS space in recent times is evidenced by investors increased willingness and ability to strike deals outside of the traditional cycle, something that was highlighted by Global Head of ILS Structuring at GC Securities, Cory Anger, discussed at the time by Artemis.

ILS market participants have become increasingly aware that the expanding wealth of capital markets capacity is available through the year and not just at renewals, argued Anger, enabling more desirable terms and greater deal efficiency than perhaps possible at renewals.

And with the insurance and reinsurance marketplace under significant and mounting pressure from a range of headwinds, reinsurers could also find increased deal efficiency outside of the typical renewal cycle and avoid broad competition, as is more common with primary business.

Evan Greenberg, Chairman and Chief Executive Officer (CEO) of Chubb Limited, highlighted the potential benefit of companies to transact business outside of the renewal cycle recently, stressing that firms are “better off” underwriting in the off months of a quarter in the current softening re/insurance industry.

The current state of the global reinsurance market has created a need for increased efficiency and discipline, the latter being something that can be seen to fluctuate at renewals during a softening cycle, as companies fight for business in an ongoing buyers market environment.

Transacting business outside of the traditional reinsurance renewal cycle could help firms achieve more desirable terms and also contribute to increased deal efficiency, avoiding the most competitive parts of the cycle that has seen terms and conditions (T&C) loosen and also ill-disciplined underwriting practices.

Of course, strong and long-standing relationships will help cedents feel comfortable doing business outside of the renewal cycle, particularly when there’s potential for cheaper rates at renewals due to the battle for market share.

Nephila Capital, the world’s largest manager of catastrophe weather insurance or reinsurance linked assets, provides a good example of avoiding the competitive renewal cycle, with both its relationship with State National and the establishment of MGA, Velocity Risk Underwriters LLC.

The ventures enable Nephila with a more direct access to the original source of risk, and importantly outside of the competitive, traditional reinsurance renewal cycle.

Innovative approaches as seen with Nephila, and strong relationships with existing cedents, could enable reinsurers and ILS market players alike with more efficient and less competitive access to business outside of the renewal cycle.

A trend that could become a more common feature of the current re/insurance marketplace, with the softening and highly competitive landscape showing no signs of turning anytime soon.

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