Short placements tell us about the additional price margin reinsurers build into their authorizations.
Last time, we used oversubscription to measure inefficiency, but we know what many of you who read our analysis were thinking – my broker does a great job and my program always starts as a short placement, particularly in the current hardening market. If this is you, on the surface it sounds like you are getting a great deal. And indeed your broker is working hard for you. But if we dig a little deeper, things do not look so sunny. If your broker was able to convince reinsurers to provide more coverage, it means you weren’t getting their best offers the first time around.
The market at large offers insight into how much capacity reinsurers typically withhold. For example, if your broker manages to fill your program when initial authorizations only covered 85%, you know that reinsurers were withholding at least 15% of what they could have authorized on your program. Moreover, if brokers regularly fill programs that are initially 85% placed, it indicates that under current market conditions, reinsurers are typically withholding at least 15% of what they could authorize – even if your program is not a short placement, this is often simply a signal that your firm order terms were so high that your program filled in spite of the fact that reinsurers were withholding supply.
Tremor’s unique aggregate supply data allows us to translate the amount of capacity reinsurers withhold into implied price hikes. We discuss our aggregate supply data in more detail in our previous post, but the idea is straightforward: the aggregate supply curve captures the total amount of coverage that reinsurers have authorized at each price point. The graph below illustrates how the difference between initial and final authorizations can be viewed as either withheld quantity or a price hike. Using this data, we can then estimate the price hike associated with different placement rates.
The Data Speaks
Our results are striking – if a broker can frequently fill a program that was initially 85% placed, aggregate supply tells us that the reinsurers are commonly inflating their initial indication of supportable pricing by at least 7.5% on average. More generally, for realistic placement rates, we find that, on average, reinsurers must be inflating prices by at least 5%-10%, maybe more. This indicates that price inflation is present and substantial across the board, even on programs that are not a short placement.
Tremor minimizes widespread price inflation through proper marketplace incentives. A traditional placement is simply a brokered negotiation, so you should fully expect reinsurers to have built additional margin into prices considered in their initial authorizations. In contrast, placements on Tremor leverage the latest smart market technology that prevents and penalizes this behavior. Reinsurers are always allocated at the market clearing price, and those that do inflate pricing in their bids will ultimately lose out with smaller allocations. For the cedent, Tremor offers an unmatched ability to incentivize reinsurers to put their best foot forward, leading to an optimal and efficient placement.
More capacity from reinsurers means more competition and better pricing. We use Tremor’s unique aggregate supply data to illuminate how a surplus of capacity impacts price.