Weaker terms erode reinsurance economics, introduce unmodeled risk: RenRe CEO

Continued weakening and expansion of reinsurance renewal contract terms and conditions are a dangerous trend, according to RenaissanceRe’s CEO Kevin O’Donnell, as they reduce overall deal economics and can introduce unmodeled risks.

There have been constant rumblings of discontent in the reinsurance market about the expansion of terms and conditions, making them overall weaker and more favourable for cedents, in the last year or so. Many market participants feel that terms and conditions have been pushed to their limits, placing those who underwrite reinsurance business with expanded terms at increased risk of being hit by unexpected or over-sized losses.

At the same time, others in the market have sought to play down the expansion and weakening of terms, saying that it is not as prevalent as reported or that it only affects the smaller, following reinsurers, who do not have the ability to dictate contracts using terms that are in their own favour.

From the expansion of coverage to include new and often unrelated risks, such as the well-documented bundling of cyber and terrorism risks with catastrophe covers, to the bundling of treaties resulting in a more opaque view of the underlying risks, to the extension of the hours clause and the new prevalence of multi-year deals. All of these developments require a more diligent and technical approach to underwriting and portfolio management, or reinsurance firm’s could risk introducing unexpected and unquantifiable risks to their portfolios.

Warnings have been given about this growing trend in recent months, see links to other articles covering the expansion of T&C’s in reinsurance at the foot of this article, but still concerns rumble on in the marketplace. The interesting question that comes to mind, is that while some say this is a market-wide issue but others claim it doesn’t affect them, who exactly is taking on these expanded risks? Somebody must be underwriting them.

Kevin O’Donnell, the CEO of Bermudian reinsurer RenaissanceRe is clearly of the opinion that his firm is not one of the ones over-exposing themselves to a multitude  of potential future issues by taking on ever-increasing amounts of uncertainty through terms and conditions expansion.

Discussing the state of the reinsurance market during his firms recent Q3 earnings call, O’Donnell said that RenRe continues to focus on accessing quality underwriting business; “In property cat, so far this year, we have leveraged our industry leading market position, relationships and technology to access the best business.”

RenRe has continued to back-off from reinsurance business it feels is underpriced or which is unattractive to the reinsurer; “We continued to pull back where price declines resulted in business not meeting our return hurdle rates, but our focus remains the same to construct an attractive and efficient portfolio.”

“We believe, as we always have, that discipline is imperative in this market,” said O’Donnell, continuing on the theme and seeking to drive home to listening investment analysts that RenaissanceRe is not allowing its standards to slip.

The challenges are set to continue though, which means pressure on terms and conditions will remain a feature of the upcoming renewals too. O’Donnell said; “In the third quarter, our focus transitions from our in force book to our strategy for renewals, absent a major event or catalyst, we don’t see macro trends changing much as the year plays out.”

“This will likely put additional pressure on pricing for property cat and ceding commissions in casualty and specialty classes,” he said. But one issue at the upcoming renewals that RenRe will pay special attention to is, according to O’Donnell; “An area that we are monitoring carefully is terms and conditions.”

O’Donnell explained that pressure on terms and conditions can be dangerous in two ways to reinsurers like RenaissanceRe; “Weakening of terms can be a dangerous trend in our view. It can involve not only a reduction in deal economics, but also an introduction of unmodeled risks to the portfolio.”

In essence O’Donnell is referring to the fact that a reinsurance underwriter can get paid less for the risk, as expansion of terms and conditions increase the amount of risk included, while at the same time taking on uncertainty and unmodeled exposures which are more difficult to identify through more opaque terms and bundling of contracts.

There has been enough talk about the pressure on reinsurance terms and conditions by now to make it extremely likely that some firm in the market will find this comes back to bite them. It would be incredibly lucky for nobody to find that taking on more risk for the same price, while providing more coverage and assuming risks that are obscured from view is an approach which is inadvisable.

Of course for the impacts of expanded reinsurance terms and conditions to really show through, the market will need to see some larger losses. Should we see a complex loss, or something unexpected or outside of modelled experience, we could begin to see pressure on terms being reflected in results and the identity of those who have been taking on expanded contracts (as we said someone must have been) may become clearer.

Other articles on the expansion of terms and conditions in reinsurance:

– Beyond price, pressure increasingly seen on reinsurance terms: PartnerRe CEO.

– Multi-year reinsurance deals may indicate weaker discipline: S&P.

– Expanding terms, competing with selves: A.M. Best on London re/insurers.

– Reinsurers accepting broader terms likely to experience painful losses: KBW.

– Loosening of reinsurance terms & conditions ‘dangerous’: KBW analysts.