Ceding company behavior aimed at scrutinizing the security of prospective reinsurers is having a negative impact on an already soft market, one reinsurance expert warned here.
Elizabeth Mitchell, president of Platinum Underwriters Reinsurance in New York–who is also a fellow of the Casualty Actuarial Society–made the observation during the opening session at the recent CAS Seminar on Reinsurance here.
Ms. Mitchell and two other actuaries agreed that while reinsurers are exercising more pricing and underwriting discipline than their primary insurance company counterparts, an orderly reinsurance market that prevailed during the Jan. 1 renewal period is starting to unravel.
In addition, they said this soft market has many of the same characteristics as prior downcycles. A new twist, however, is increasing scrutiny of ceding companies, noted Ms. Mitchell, who was named 2007 Woman of the Year by the Association of Professional Insurance Women.
While there has always been scrutiny, she said–noting that in the past ceding company requirements were described as “flight-to-quality” considerations–”what ceding companies now are doing is [developing] their own little models to judge reinsurer’s security,” rather than just relying on rating agency capital standards.
The ceding companies are keeping track of their receivables by reinsurance company, “and if they get too large, they’re saying, ‘I know that you have acceptable security from a rating point of view, [but we] have too much risk with you.”
“This phenomenon applies even to the most highly rated companies like Swiss Re,” she said, noting that ceding companies will refuse to put any more reinsurance business with a company with which it has a high level of receivables, unless they have some collateralization.
“Most of us in the United States don’t want to post collateral. It’s expensive, and we spend all this time getting licenses in the United States” to avoid such requirements, she added.
Ms. Mitchell highlighted the impact of this trend on casualty reinsurers in particular, noting that casualty receivables go down extremely slowly. “So unless we start commuting [selling back] contracts, they’re not going to reduce,” she said.
“My clients are demanding that I hold more and more capital in absolute terms,” she added, noting that when Platinum started up in 2001, the company had $1 billion in capital and over $350 million in the United States. Today, the company has $2 billion overall, and over $500 million in the United States, but clients find that less acceptable.
“We as an industry–the reinsurance industry–are not growing our capital. We’re giving it back,” she said, referring to the fact that concerns about returns on equity are prompting stock buybacks and dividend payments.
Ms. Mitchell suggested that by reducing an already small pool of casualty reinsurers they’ll consider, and requiring more capital from each reinsurer, cedents may be fueling competitive behavior.
She noted that one of her companies’ cedents recently “upped the number they want you to have in the United States, regardless of rating, from $750 million to $1 billion,” she said.
“The problem with that is I don’t have enough uses for that capital. If I have it, someone’s going to force me to make a return on it,” she added, recalling her conversation with the cedent representative.
“So you’re basically encouraging me to go out and write cheap reinsurance for your competitors, which seems to me to weaken my financial condition rather than provide the security you’re demanding,” she continued.
“There’s this presumption that bigger is better. That is not always the case,” she concluded.
“The way people are looking at the amount of capital you need is fundamentally changing–and it’s getting a lot more scrutiny from a lot of different sources,” she said. “Wall Street has always looked at it, and the rating agencies. And now our ceding companies as well as our own economic capital models” are coming up with different answers as to “what’s truly excess [capital] and what isn’t, [and that] is putting some pressure on how we manage our companies.”