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“ Buyers should be looking for a solid track
record, including long-term performance, stable
find the appropriate liquidity on the left-hand side of
their balance sheet.” management, and the willingness and ability to
reinsurers have a different business model and hence pay claims.”
are unlikely to suffer the same liquidity problems as
the banking sector, continues Ehrhart. “reinsurers just
didn’t feast at the table of debt like the banks did—
are now many reinsurers in the same credit rating band, explains Chris Klein, global head of
reinsurance company leverage is somewhere in the
business development at guy Carpenter. “The market is being squeezed into the ‘A-’ to ‘A+’
order of 15 to 20 percent of total capital. because of
range and one has to ask if it’s now more difficult for a reinsurer to differentiate on its credit
its volatility, reinsurance has historically been a business
quality, and that’s how many people tend to measure them—how do you stand out?”
that has used very little debt leverage, so a lot of the
failures in the banking industry simply aren’t in the
From a buyer’s perspective, more homogenised ratings should make it easier to diversify
formula for reinsurers.”
among reinsurers. but cedants are again advised to look beyond the ratings. There is a range
of quality within a single rating range, explains Klein. The rating reports produced by the
The rating agencies are keen to point out that ratings
rating agencies can provide some clues as to which entities are stronger than others, while
are just an opinion. “We’re very dependent on the
additional insight can be gained through discussions with intermediaries. “All ‘A-’ ratings are
transparency of management,” says bob derose, an
equal but some are more equal than others. buyers have to do some due diligence of their own,
analyst at A.M. best. “They have to tell us the facts
rather than just relying on what a rating agency says.”
and be honest. To the extent that they are less than
straightforward in admitting possible concerns or
Klein thinks reinsurance price and availability will continue to be buyers’ primary concern as
weaknesses, this can handicap the rating.” he adds
the industry gears up for renewals. but beyond this, the focus will continue to be on managing
that management can sometimes be reluctant to put
counterparty risk and concentration risk through diversification. long-term, this is a healthy
forward the negatives for fear that it will be detrimental
way to approach reinsurance buying. “It’s not just the risk of default—if the large one goes,
to the rating.
cedants may have to write off some of their recoverable—but also when you have an excessive
concentration within the market, you may be handing them a lot of leverage and then who
derose thinks cedants should not rely too heavily
starts to dictate the terms?”
on ratings and should instead reach their own
conclusions on reinsurer financial strength, based on
With capital returning to the industry, and no significant catastrophe losses so far this year,
solid due diligence. “Just like you should maintain
the expectation is for reinsurance capacity to increase and prices to flatten, which will be
pricing discipline, you should never relax your credit
welcome news for cedants. The return of the capital markets will also alleviate buyers’ concerns
discipline either—if you do, then you’re exposing
surrounding reinsurers’ ability to recapitalise post loss.
your balance sheet to losses from a different source.
A prudent manager should maintain a reasonable level
The dynamics at the January 1, 2009 renewals were less certain, remembers bill Jewett,
of surveillance on their counterparties.”
president and chief executive officer of Endurance Worldwide reinsurance. “Certainly, for
the last January 1 renewals, the financial crisis was bearing down on us with full force. Insurers
As part of that due diligence, buyers should be
demonstrated heightened awareness of counterparty risk, along with greater scrutiny of the
looking for a solid track record, including long-term
quality of reinsurers’ capital and their financial stability. Coupled with that was an increased
performance, stable management, and the willingness
emphasis on diversification of risk by insurers, including increased syndication of programmes,
and ability to pay claims. “Everybody says there’s a
even where counterparties exhibited excellent financial strength.”
flight to quality,” adds derose. “Obviously, the higher-
rated and better-regarded companies with proven track
It is clear that the financial crisis will have a lasting impact on buying behaviour and the
records should fare better than those organisations that
treatment of counterparty credit risk. long-term, this could see trends towards greater
are lower-rated and haven’t been around as long—
subscription underwriting, more use of broker distribution and a reduced direct market.
certainly for casualty-type business—but there’s a value
Scrutiny of financial statements, rating reports and assessment of claims-paying history will
in diversifying, be it property or casualty.”
increase, while placement teams are also likely to become more diversified and sophisticated.
but there will continue to be a place for old-fashioned relationships in the industry, thinks
Jewett. “relationships are critical in this industry. by building long-term relationships with
our brokers and cedants, we have a much better understanding of their respective companies,
One challenge for reinsurers as they vie for business get to know their management teams and how they behave in different circumstances, and
from one another during the renewal process in Monte really understand their challenges, objectives and strategies,” he explains. “It can only enhance
Carlo and baden baden this year is how to differentiate the value for all involved—brokers, cedants and reinsurers. There is certainly an increased
themselves. rating downgrades have meant that there appreciation of the value of relationships in the current reinsurance market.”
16 | INTELLIGENT INSURER | September 2009
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