Page 265 - M97TB9_2018-19_[low-res]_F2F_Neat2

Chapter 9 Reinsurance market 9/33

Market cycles
• Reinsurance is particularly susceptible to market cycles, since terms for both proportional treaties and excess of
loss contracts are agreed in advance of the actual treaty or contract period, and rarely amended during that period.
• Price volatility is typically greater for non-proportional reinsurance business. Proportional rates tend not to fluctuate
quite so widely because this business is more closely linked to the less volatile underlying direct business.
• Hard reinsurance markets tend to follow an abnormally large loss, and particularly a large natural perils event loss.
• A soft market typically arises after a period where there has been little major loss activity and competitive market
forces.
• Managing the cycles includes:
– maintaining strict control of pricing;
– actively managing the portfolio;
– underwriting for technical profit not investment income;
– gearing staff remuneration towards profit and not volume; and
– using capital efficiently.
• Market capacity is high during a soft market and low during a hard market. A hard market attracts new entrants
whilst a soft market discourages them.
Financial strength ratings
• Rating agencies assess, and rate, the ability of reinsurers to pay claims.
• Typically, rating agencies will assess the company’s financial strength, its operating performance and market profile
become coming to an overall assessment of claims-paying ability.
• In assessing the financial strength of a reinsurer, the rating agency will consider:
– the reinsurer’s ability to access capital;
– the quality of its reinsurance programme;
– adequacy of its technical reserves; and
– its liquidity.
• In assessing its operating performance, the rating agency will consider:
– profitability; Reference copy for CII Face to Face Training
– sources of business, nature of premiums and investment income; and
– all aspects of its management experience and associated objectives.
• Rating agencies use alphabetic indicators, such as AAA – with or without + or – signs – as the mark of the
strength of their rating, and provide supporting definitions.
• Ratings will be subject to formal evaluation at least once every twelve months and following significant events, and
to ongoing review throughout the year.
• Great importance is attached to financial strength ratings, especially so in the case of reinsurers writing long-tail
business. Without one, or one at an appropriate level, a reinsurer will sometimes have difficulty attracting brokers
and/or reinsureds to place business with it.
Terrorism
• Following 9/11, a clause was introduced in the London Market to exclude terrorism in reinsurance policies to reflect
a similar exclusion under direct insurance policies. However, insurance companies and Lloyd’s syndicates do
provide cover on a case-by-case basis.
• International perspectives on terrorism vary according to the perceived threat posed. Chapter

9