Experts Offer Advice On Attracting Reinsurers

"From my perspective as a reinsurer, there are a number of things we are looking for. Number one, we are looking for the potential for a profitable relationship over the long haul," said Lee Bondhus, chairman at RAM Mutual Insurance Co. in Esko, Minn.

Mr. Bondhus said he may not see any profit in the first few years. But over a long relationship "that potential has to be there or my company is not going to have an interest."

With a long-term commitment in mind, Mr. Bondhus said he would not be interested in someone who has "a track history of hitting and running."

"There is enough gamble in this business without rolling the dice any more than you have to," he advised a conference of insurers. "If a company has a history of getting into reinsurers' pocket and then going on to someone else, I certainly wouldn't be interested."

Frank Bigley, vice president at Farmers Mutual Hail Insurance Co. of Iowa, based in Des Moines, Iowa, added that he can't emphasize enough the importance of gross underwriting result from carriers. "That's what we look at. Sometimes, we deal with companies that point very proudly to their net underwriting result, while their gross doesn't look very good," he said. "Well, the difference between the gross and the net is me. So why should I pick up your problems? It's that simple."

Reinsurers also keep a close eye on managerial qualities of carriers, Mr. Bigley also said. "On the management side, our interest extends beyond the manager with whom we have to be comfortable and confident that he or she can bring the company forward, but also to the board of directors," he explained of his company's evaluation process.

Mr. Bigley said his company sometimes doesn't get to meet board members of primary insurers until after a deal is signed. And what he's been finding is that "a tremendous number of board members know very little about running an insurance company."

"They don't understand the accounting, and they don't understand the numbers they are looking at."

"This year, we have spent a lot of time helping our managers educate their board members. So that's a big issue under the general management topic," he said.

Reinsurers are also very interested in these managers' willingness to listen to suggestions, Mr. Bigley also advised. "We don't claim to have all the answers, nor do we have any interest in running your company. However, we are in and out of an awful lot of companies and see a lot of the same problems, and we might have some good suggestions to you that you can implement to help solve problems."

The ongoing education of both the manager and board members at primary companies is also very important, Mr. Bigley said. "We do want to see an active involvement by managers in programs offered by NAMIC, CPCU or other associations," he noted. "The world just changes so fast now, if you don't keep up, you could be completely lost on important issues in a very short period of time."

Bruce Heaton, president of Frontier Mutual Insurance Co. in Lincoln, Ill., offering an insurer's perspective, echoed Mr. Bigley's emphasis on gross underwriting results. "What has been your gross loss experience, combined ratios, for the minimum of last 10 years?" Mr. Heaton asked.

"If you are not making money on gross basis over an extended period of time, and if you don't have more premiums than losses, you don't look very attractive to reinsurers," he advised. "So if you haven't been very good in the past, you need to get your house in order for the future: improve that loss ratio on a gross basis."

Mr. Heaton also suggested that another question reinsurers would ask carriers regarding their past experience is, "What's your premium-to-surplus ratio? In other words, are you financially sound?"

There is probably no real magic number to the ratio, he said, but added he personally doesn't like to see a premium-to-surplus ratio greater than one-to-one.

"I want to have as much surplus as premium. If you get to the point where you are writing twice as much premium as the surplus, that's as far as you should go, particularly if you are a small company," Mr. Heaton said.

Another question reinsurers will ask is, "Where did the money come from? Did you make the money that got you that surplus, or did you just merge somebody in, get some money, but have been losing your tail for years?" he noted. "So reinsurers will look at how much money you got as well as where that money came from."

Mr. Heaton also advised that reinsurers will also be interested in the carrier's long-term management plan. "Many of these reinsurers are going into a long-term partnership with you and they are concerned about who will take care of that book of business when you are not there," he said.

"Looking into the future, reinsurers will want to know what your underwriting practices are–how you choose your business and how you rate. Have you consistently had a system of looking at your rating scheme? These things all affect the bottom line and these are the things good reinsurers will look for."