Supply curves are fascinating – they capture reinsurers’ unique strategies and risk appetites in a way that only Tremor’s modern market tech and confidentiality rules can. How do reinsurers use them in practice? In this post, we analyze real supply curves and find a wide variety of curves and a wide variety of appetites, with one particularly interesting finding: based on our estimation, the reinsurers who put more effort into their curves are more likely to get the allocations that they want.
The best place to start is to look at examples. The graph below shows 25 supply curves randomly selected from those submitted to our Panorama platform. Each supply curve represents a reinsurer’s authorization for an individual product (a layer or quota share, say), normalized so we can show curves from different risks on the same plot – on the y axis we have the reinsurer’s price relative to the final clearing price, and on the x axis we have the line size as a share of the risk. (For more background on supply curves, see this post.) Notice that they vary widely in price, quantity and shape:
Pricing can vary by a factor of 2 between reinsurers, with some curves offering coverage nearly 25% below the final clearing price and others offering coverage 50% or more above it.
Reinsurers have appetites for different line sizes, as seen by the variety in the horizontal extents of the curves.
The curves themselves have a variety of shapes representing a variety of strategies. Many are simply a flat line connecting two points, but the majority use sloping segments to indicate line sizes that increase with price, i.e. they sell more at higher prices.
The curves we see above are just a sample – what can we say about the whole population? The number of points in a supply curve is an important metric that captures the overall complexity of the reinsurer’s authorization. The simplest curve is a single flat segment that connects two points; reinsurers who submit two-point curves make what is effectively a single take-it-or-leave-it offer to the cedent. As the number of points increases, so too does the allocative precision that the reinsurer will get; reinsurers with more points in their supply curve tune their line based on the final price chosen by the cedent. The chart below breaks this down for real curves – about 25% of curves are simple, two-point curves, while more than 40% of curves include at least 4 points.
A strategic curve
The graph below shows an interesting supply curve we found in our data. This particular curve was strategically constructed to take advantage of the way supply curves let you control your allocation. Notice:
On the left, the curve starts at a low price but only offers to cover about 3%-4% of the risk until the price gets into the range that the reinsurer really needs. This reinsurer knows that Tremor uses concurrent terms (all reinsurers get the same price), so this is a strategic move to guarantee that it maintains a small participatory line even if its pricing is above the rest of the market. On the other hand, the curve offers an additional 15% share once the cedent meets the reinsurer’s needed pricing; the cedent will see this (as part of the anonymized aggregate supply) and have an incentive to meet it.
When the price reaches a range that is acceptable to the reinsurer, the curve indicates that the reinsurer strongly desires to cover about 20% of the risk.
Above 20% of the risk, the curve steepens. A steep curve means that the reinsurer doesn’t strongly desire a larger share but is willing to provide more coverage if the price increases substantially.
Target allocations and success
When we look at real supply curves, particularly like the example in the last section, we see that reinsurers commonly come to Tremor with a target in mind. In the example, the point at a 20% share of the risk stands out – meaningfully below this point the reinsurer only offers a small participatory line; above this point the reinsurer is offering additional capacity only when the terms are particularly attractive. We cannot be certain what the reinsurer was thinking, but we can guess that they would have considered their authorization successful if they got a share of at least 20%. More generally, every supply curve has an inflection point where the reinsurer transitions from authorizing what it desires to authorizing opportunistically – reinsurers who are allocated more than this inflection point are likely happy with their allocations while reinsurers who are allocated less are likely disappointed.
To understand whether or not individual supply curves might be considered successful, we identified these target points for all curves in our dataset. We then compared the targets to the actual lines – if the line was larger than the target we considered it a success. The results are striking. We see a strong correlation between the likelihood of a successful allocation (an allocation at or above the target) and the number of points in the supply curve, suggesting that reinsurers who provide richer supply curves are more likely to hit their target. In effect, rich supply curves (as part of the anonymized aggregate supply that the cedent sees) are more likely to be realistic and to influence the cedent’s final pricing, leading to a successful allocation for the reinsurer.
If you want to learn more about supply curves or Tremor’s modern Panorama placement process, we’d be happy to give you a demo or answer your questions. Reach out to us!