Insurers seeking diversity in reinsurance buying: Aon

A review of the 2004 reinsurance treaty renewal season shows primary insurers are looking at diversifying their spread of reinsurance, as well as focusing on reinsurer security ratings. Reinsurers, for their part, are looking for transparency from their primary company clients, in order to ensure the profitability demanded by investors.
So says Aon’s latest report, “Reinsurance at the Crossroads?”. While many anticipated fierce negotiation yet again in 2004 renewals, competition remains in the reinsurance market, the report goes on to say. In this respect, headway was made by new players with “clean capital” against traditional players laden with prior year loss issues and profitability imperatives.
“All the traditional players are stressed. The question is, are they mortally wounded? Will the new capital make an irretrievable reduction in their business?” asks Clement Booth, chairman and CEO of Aon Re International.
The new Bermuda and London players forced an overall reduction in rate of about 10%, estimates Olivier du Passage, chief executive of Aon Re France.
While the current environment could be categorized as a “seller’s market”, cedants are becoming increasingly concerned with the financial strength of their reinsurers and looking to spread their risks across a larger number of reinsurers, the report notes.
The tensions evident during the recent renewal season came from downward pressure on rates due to an over-abundance of supply set against a critical need for underwriting profit,” says Charlie Cantley, deputy chairman of Reinsurance Aon Ltd. Either way, the prime drivers now for the buyer in defining the value proposition of a reinsurer are security rating, risk diversification and exposure to U.S. legacy risks.”
Both sides often left the bargaining table dissatisfied, the report notes reinsurers aspiring to higher rates than were attained, and insurers looking for rate reductions greater than what materialized. However, in the “battle to see who blinks first”, Aon says, cedants won more often than not, forcing reinsurers to flatten and even reduce rates, even on lines as troubled as U.S. workers’ compensation. This scenario prompts Aon to conclude that the zenith of the hard market is definitely past.
The vision of reinsurance in the 1990s an industry dominated by a few giant players with unassailable security ratings is gone, says Aon. The largest insurers can expect to lose further ground to the new, nimble capacity.
And “relationship” as the industry buzzword has been superceded by “profits” for reinsurers. For primary insurers, relationship has given way to capacity and the ability to pay claims.