As a part of the vertical layering of risk and sharing of losses, reinsurance is naturally playing an important role in this increasing need for a buffer layer, according to James Drinkwater, president of AmWINS Brokerage.
Placing risk with reinsurers allows primary players to write more business with higher limits because potential losses are shared. So when reinsurance is relatively cheap, it means demand for any buffer layers is greatly diminished as the points between where primary limits end and excess limits begin bump up against each other.
However, Drinkwater notes, with the cost of reinsurance starting to become more expensive, primary insurers have looked to reduce policy limits—restructuring the spread of risk and contributing to the gap between primary and excess layers.
Primary carriers could keep the same higher-limit structure, but the price of reinsurance would increase as a result, and the higher cost would be passed to policyholders. “That would make these underwriters less competitive and do less business,” Drinkwater says. “So they look for alternatives.”
In addition to rising prices for primary-risk transfers, industry experts add that the reinsurers that support excess and umbrella markets are calling for higher attachment points as well.
And in case there are any skeptics out there, know that consensus does seem to be emerging that the reinsurance market is hardening—at least based on the evidence of a number of recent earnings-season conference calls.
Michael S. McGavick, CEO of XL Group, said about 3Q results that nearly every line of business is showing either flat or positive rate change.
And Costas Miranthis, president and CEO of PartnerRe, told analysts that there is “a clear recognition that rates should rise” as recent catastrophes have led to greater respect for risk.