Reinsurance actuaries have a grip on the current market, so small carriers beware, according to speakers during the "View from the Top" session at the Chartered Property Casualty Underwriters Society Reinsurance Section Symposium in March in Philadelphia. Although the reinsurance cycle can seem daunting to insurers big and small, they said, it can be managed.
The cycle's current state is one in which carriers of all sizes are facing shrinking reinsurance markets, said George M. Gottheimer Jr., president and CEO of insurance and reinsurance management consulting firm Kernan Associates Inc. This situation, he said, is particularly problematic for smaller and midsize carriers.
Lanny Strain, chief operating officer of Fire Districts of New York Mutual Insurance Co., agreed. He said the current market is under the influence of reinsurance actuaries, more so than in softer markets. His company, because of its size, makes a perfect case study, he said, for why this market is especially tough for smallish insurers.
Fire Districts is a niche mutual that writes in one state, for one line (workers' compensation) and in two classes. Because it's a mutual, Strain said, the company has to write for anybody in those two classes. This is a "design problem, a structural problem," he explained, that creates misunderstanding and difficulty for reinsurers, who then send rejections in bulk.
Even a recent turnaround in his company's fortunes, Strain said, didn't matter to the actuaries.
"Did our reinsurance get any cheaper? Nah. Not even close," he said. "Our reinsurance actuary's name is Bruno. Bruno roughed us up. Bruno roughed us up pretty good."
On the contrary, according to Gerald E. Finley, chief casualty treaty underwriting officer for American Re Co., small and midsize carriers like Fire Districts should actually be attractive targets for reinsurers. Regional middle-market clients offer stability, he said, as reinsurers navigate the cycle.
All carriers, no matter their size, are trying to pull off the same balancing act, he said. They try to achieve risk adequate pricing and deal with accumulation risk, all while attempting to pull off growth.
The issue there with smaller carriers and reinsurance, however, is that they face a tradeoff between how much retention they can keep and how much reinsurance they can buy, said Stephen Tirney, senior vice president of Harbor Point Services, formerly Chubb Re. Smaller carriers typically buy reinsurance pro rata, he added, and find themselves in a "vicious cycle" hunting for reinsurance they can't afford.
For Finley, the key to managing reinsurance cycles for any carrier would be to focus on and manage the cycle specific to its business, not the entire industry's. The cycle never changes all at one time for everyone, he said, but constantly evolves differently for different lines.
Finley offered general advice that underwriters can use to safely surf the cycle, including: account for accumulation in terrorism and natural catastrophes; avoid "herd mentality" when it comes to pricing; and focus on the training of the future generation of underwriters.
"What I've seen recently," he said, "is that a lot of the on-the-job training, formal training, has gone by the wayside."
May 1, 2006
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