ARE YOU A
SWITCHED-On
BUYER?
Corporate insurance buyers who can understand and replicate their
insurers’ and reinsurers’ rating processes stand to get the best results,
say Raj Ahuja and Tom Hettinger.
We have heard a lot in the trade press on both sides of the Atlantic Property is not, however, the only important class of insurance to
about relations between risk managers and their insurers, and about consider in this context. Liability (especially workers’ compensation)
how buyers can make their programmes more attractive in the eyes and auto are two other areas where losses and premiums have escalated,
of underwriters. Much of the comment has rightly concentrated on partly because of legislative developments and inflation.
issues such as demonstrably high-quality risk management procedures
The methods used by insurers and reinsurers to rate large corporate
and accurate exposure information. Important as these are, there has
risks have gone through a transformation in the past five years in
been relatively little comment on another and often critical aspect of
response to rigorous methodologies, supported by rating and
negotiation: the way re/insurers rate their risks.
simulation software, and to pressure exerted by security analysts and
There are two reasons why understanding this aspect of the business is
shareholders.
beneficial to commercial buyers. Firstly, it provides useful insight into
Until the end of the 1990s, most underwriters’ rating strategies could
underwriters’ thought processes. Secondly, applying the same processes
be summarised, admittedly with some degree of oversimplification, by
to their own organisations will enable them to better understand their
the following formula:
risk profiles and exposures, and to identify the most cost-effective steps
Old price, allow for insured’s recent loss experience, allow for market trends
to acquiring greater stability. This is especially desirable at a time when
=
insurance-buying strategies are changing, usually with substantially
New price
increased retentions.
This ‘suck it and see’ approach goes a long way towards explaining
These benefits apply whether or not there is a captive involved, and
why so many risk carriers once haemorrhaged losses by underpricing
to negotiations with reinsurers as well as insurers. Such considerations
their products. Put simply, this approach is out of date and only a few
are especially relevant now that deductibles are at historically high insurers still cling to it. Yet, it remains embedded in the mindset of
levels and that, whether or not you agree with them, the weather many buyers, contributing to the misunderstandings that occur around
modellers are urging us to take a pessimistic view of future patterns. the negotiation table.
BermudaReinsurance . February 2007 29
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