Opinion


13.09.15 SUNDAY


Why the rating agencies love a leader A


key element refers to their of the rating process is


‘competitive position’, which for reinsurers ability


to attract and retain


business in a tough marketplace. The rating agencies understandably tend to believe that ‘pricing power’ is vital to this process, and to a degree they translate this into the ability the reinsurer has to lead business. That’s identified by the amount of business they actually lead. For anybody not working in reinsurance,


it’s not difficult to follow this logic—if you’re viewed as a leader, you will be offered business, you’re in control of your own destiny (an important concept for ratings) and that must surely give you a competitive advantage. As a veteran of 20 years of working in the


reinsurance markets, before I started working in the ratings world, this had always frustrated me, especially when I think of the smaller reinsurers. OK, so it’s clearly important for the ‘big boys’, but it seems to me that it’s a positive disadvantage for smaller players. The big boys have their feet in most, if not all, markets—they rely on that diversification to give them stability, and leading business is part and parcel of their market presence. But if I were a smaller player I’d want to


play a different game—in fact I most certainly wouldn’t want to do it like the big boys. I’d want to be nimble and selective, looking


at the changing landscape and finding the bits that I can work to my favour, avoiding the ones that just don’t add up. The key to that is the changing landscape—some markets, countries, sectors, cedants, programmes/layers are good from a reinsurer’s perspective at some times and not so good at others. Being a ‘leader’ comes with a number of responsibilities—agreeing


the price and


having an influential role in the structure, but it also comes with some additional costs in the servicing of the business. And it also comes with an expectation that you’re going to do your best to hang around—maybe not to the thinnest end of the thick and thin, but certainly to ‘not so thick’ and even to ‘getting rather thin’.


Rating agencies pay close attention to reinsurers’ competitive positions and determine this, in part, by examining a company’s ability to lead business. Peter Hughes, director at Litmus Analysis, examines the implications of this logic.


Yes, there’s a degree of stickiness around


relationships, but ultimately you have a lot more freedom to pick and choose. So for me, the characteristics that


a


smaller reinsurer should possess are: the ability to price properly; the ability to attract and retain business; management


with a


proven record; and a robust approach to cycle management (a clear approach to managing volatility).


In addition, it can help to have owners that


understand what being a reinsurer involves. Underlying all


of this should be well


managed risk management processes, a sensible level of diversification and a suitable level of capital. From a ratings perspective it also helps to have good management information providing underlying data and proof that the above are really working. In my reinsurance days, I worked for one


particular very large company and another that was much smaller. The most immediate lesson I learned in moving from one to the other is that, generally, large insurers prefer to work with large partners, and smaller insurers with smaller ones.


Peter Hughes


“Having clients who are smaller, less well known, and more in need of your help can often be preferable to being the reinsurer of a more famous insurer.”


As a follower, on the other hand, you can


duck and dive a bit more—it’s easier to quit business, reduce your line size, shift from one account to another (even with the same client), from one sector to another and even from one country to another. So you can set your own price, and if the deal’s too far away, move your capacity elsewhere.


26 | MONTE CARLO TODAY | DAY 1: Sunday September 13 2015 I had a colleague who used to say that


“prestige clients can be defined as business you can be sure you will lose money on”. I would contend that having clients who are smaller, less well known, and more in need of your help can often be preferable to being the reinsurer of a more famous insurer. It’s interesting how much human nature


plays a part in who we do business with, but I do believe that smaller reinsurers can have businesses that are just as robust as their massive competitors, and that they don’t need to be the leader on a piece of business to be able to have a say in the pricing or structure. So I call on my old colleagues in the rating


agencies to start thinking differently about the role that small reinsurers can play in the market, and give them recognition for being well managed, agile leaden leaders. n


followers rather than www.intelligentinsurer.com | www.bermudareinsurancemagazine.com


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