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Controlling your allocation

May 17, 2022
By Chris Wilkens, Chief Product Officer

Tremor’s supply curves and market clearing technology give reinsurers more control over their final lines.

As a reinsurer, as soon as a renewal lands on your desk you typically know what you want. Unfortunately, the road to your final line is long. The cedent’s firm order terms – if they are even set when the submission first arrives – will be extrapolated from models and selected reinsurer input. Invariably, these extrapolated prices will be imperfect, and finalizing the placement will require sign-downs or other adjustments. For most of you, your final line is acceptable but rarely optimal.

While you strive to minimize the impact, the reality is that your control has limits and these limits undermine your ability to truly optimize your portfolio. Yes, sign-downs can be resisted and negotiations can be taken hard, keeping you close to the lines you want, but this only works to a point. Suppose the FOT are attractive and you model the risk to find that your optimal line is $10M, only to be signed-down to $7.5M when the dust settles – it’s still a nice line, but your numbers would look that much better if you could get the $10M you really wanted. You move on and apply your $2.5M capacity elsewhere at less-attractive terms. These adjustments are never catastrophic, but they add up and ultimately leave you with a portfolio that could have been that much better if you could get exactly what you wanted.

Tremor is different. With Tremor you have precision tools to specify what you want and typically you get exactly what you ask. Modern economics and optimization technology are the keys that make this possible.

Controlling your allocation with a supply curve

Tremor’s differences start with the way you authorize capacity. Instead of authorizing a single line, you authorize increasing amounts of capacity at increasing prices using a supply curve. In fact, with your supply curve, you actually tell Tremor exactly how much coverage you authorize at every possible price point. When the cedent finalizes prices, Tremor looks at your supply curve to determine your final line. As we will discuss below, Tremor’s market clearing technology guarantees that you will usually get exactly what you asked.

A supply curve

There are many ways to take advantage of the power of supply curves:

  • Run your portfolio optimization at many price points. Many reinsurers take advantage of the ability to optimize their portfolio and determine optimal lines at many price points.

  • Lock in a line with a low initial price. Most reinsurers want to maintain a small presence on a program even when the pricing is low. This maintains a relationship with the cedent while signaling that the cedent’s risk or terms are broadly not of your liking. Tremor gives you the power to do this – indicate a small quantity of coverage at a very low price, then increase your authorization to your desired level at higher pricing.

  • Pin-down your best-and-final pricing for your desired line, then offer a little more capacity as price increases. Since Tremor uses concurrent terms, you will get the line you want when the price meets your best-and-final. Subsequently increasing the capacity you offer then allows you to take advantage of particularly attractive pricing.

And remember, your supply curves are always kept confidential from the cedent as well as from other reinsurers, so make sure that what you submit is truly best-and-final.

Market clearing

Market clearing is what makes supply curves work. Why doesn’t the market collect multiple price points from everyone today? Part of the answer is that multiple price points are largely irrelevant if the cedent is going to sign you down. Market clearing prices – which guarantee that reinsurers typically get exactly what they ask – are the key.

True market clearing prices provide an almost magical guarantee: at final pricing, all buyers and sellers are getting exactly what they ask. In the context of a reinsurance placement, this means that the cedent gets exactly the coverage they need and reinsurers are never signed-down.

Tremor brings market clearing to reinsurance. As a reinsurer, you can expect to get exactly what you ask at the cedent’s chosen prices; your line is not signed-down or otherwise adjusted. Of course, pure market clearing can go awry in extreme situations, for example, if new, cheap capital were to flood the market. To protect reinsurers and cedents alike, Tremor supports panel constraints that may limit your line, including an individualized cap on your allocation and aggregate caps on the total allocations to classes of reinsurers, but it is rare that these will impact you in unpredictable ways. With Tremor, you typically get exactly what you authorize.

Constraints, subjectivities, and more

Supply curves are just one piece of the puzzle – indicating precisely what you want often requires rules for simultaneously managing multiple lines. For example, the following rules are available on a standard XoL tower:

  • Maximum line across layers. If you have budgeted $10M for a placement and want to make sure that you deploy your capacity, you can instruct Tremor to deploy it optimally on your behalf. You price layers individually, then tell Tremor you only want $10M among them; Tremor assigns lines based on your pricing and, if you were eligible for more than $10M, you get the lines that maximize your margin.

  • Line subjectivity. If you have one (or more) preferred layers, you can instruct Tremor that the preferred layers need to represent (for example) 50% of the total limit you provide on the program.

Many placements will also offer specialized authorization formats such as:

  • Stretch authorizations. If you want to get a uniform slice of an XoL tower, a stretch authorization guarantees that you get the same share of each layer of the tower.

  • Following authorizations. If you want to follow at the Tremor price, you can use a following authorization to indicate that your authorization is contingent on other reinsurers supplying the majority of the coverage purchased.

These and other advanced features all work in concert with the best parts of today’s process. Each placement starts with a submission as it always does, allowing you to ask underwriting questions and broadly maintain your relationship with the cedent. The changes come where today’s process becomes unpredictable – when it comes time to price and allocate, Tremor gives you precise control over your final allocation at the prices the cedent chooses.

Learn more

Are you interested in learning more about how to use supply curves or constraints to get more control over your allocation? Reach out to us!