Consider this true story of a ceded re buyer who stepped into a new role for a time:
[A ceded re buyer] spent X years in the role, meeting reinsurers in all the usual venues and negotiating reinsurance contracts. He shifted to [another role] for about 10 years, and then returned to the buyer’s chair. When he returned, he came back to a contract that had barely changed from the ones he negotiated a decade prior.
Contract negotiations at Monte Carlo, Baden-Baden, and other venues are an important part of today’s reinsurance renewal cycle. They transform reinsurance from a concept in the mind of the cedent into a concrete structure that has reinsurer support. Yet, considering all the effort by cedents and reinsurers alike, the results are a nonevent. Months of negotiation and face-to-face meetings culminate in coverage that is essentially the same as what was purchased the previous year. Even stepping away from a contract for a decade is often not enough to observe a meaningful change.
All this begs questions – what more could cedents and reinsurers accomplish with new tools and methods? Could everyone save time with a better process? Sure, digitizing more of what is done today may help at the margin, but the opportunity for improvement is much larger.
A better allocation of risk
Renewals offer an opportunity to improve the allocation of risk. Some reinsurers like lower layers, others like higher ones. Some reinsurers like cyber risk, others don’t. Sometimes it makes sense for cedents to cede risk, other times it makes sense to keep it. A one-size-fits-all approach, where a cedent tries to renew exactly the same coverage year over year, limits opportunities to improve the allocation of risk.
To do better, we need to help ceded re buyers solve the reinsurance placement puzzle. In a typical reinsurance placement, the ceded re buyer must find a way to assemble cohesive coverage from a panel of reinsurers who have very different preferences over risk and pricing. No decision can be made in isolation because reinsurers’ individual allocations must add up precisely, and the exponential explosion of possibilities limits the combinations that the ceded re buyer can consider.
Modern economics and optimization tools are the keys to an improved allocation of risk. A synchronized process based on modern market design principles allows reinsurers to express their true preferences over different kinds of risk and the coverage they are able to provide. Using this information – orders of magnitude more information than ceded re buyers get in the process today – modern optimization tools help solve the allocation puzzle, driving a truly optimal panel and allocation of risk.
A better process
Should four months of negotiation be necessary to amend three or four paragraphs of a contract and determine that prices should go up or down by 3%? No. Pricing is the perennial question at renewals and some terms change, but the value created in the evolution of the reinsurance contract is strikingly out of line with the amount of effort it takes to renegotiate it. The reason for the discrepancy is syndication.
Syndication turns a simple negotiation into a complex and exhausting ordeal. Does it take four months to negotiate a +1.5% price change in a single contract with a single counterparty? It shouldn’t. Does it take four months to get 20 parties to agree on a +1.5% price increase? If there are 20 parallel negotiations that need to proceed in a coordinated fashion, four months might even be optimistic. Everyone has an incentive to posture for the best individual terms. Nobody wants to commit and find out later that they missed the boat – no reinsurer wants to be bound at last year’s terms when the market is collectively pricing +3% or getting better terms; no cedent wants to accept a quote at +2% only to find out later that their peers negotiated -1%. The natural consequence is that everyone haggles until they can’t hold out any longer. Even worse, even a single reluctant reinsurer can create a bottleneck that derails an entire placement – reinsurers’ lines must add up to cover the cedent’s risk, creating tricky dependencies between negotiations. These complexities turn a few weeks into four months.
How can we do better? Two key changes revolutionize the process when cedents place with Panorama:
Finalize contract wording up front. In a firm order terms (FOT) placement, contract wording is negotiated after authorizations are made. A single reinsurer haggling wording on a minor clause can hold up the contract for everyone. Instead of letting wording negotiations ensnare the process, Panorama requires contract wording to be agreed before coverage is authorized. Only significant material considerations will justify delaying the process – they will get their due, while parties have strong incentives to resolve minor considerations quickly and efficiently.
Collect everyone’s views on price at the same time and identify the market clearing price. When everyone’s view is collected simultaneously, the optimal price can be triangulated with modern optimization tools and nobody will miss the boat. If the market clears at +2%, then most reinsurers – and, in particular, partners who are taking a large share – support that price. Meanwhile, enough capacity is available that reinsurers who insist on even higher pricing would ultimately be forced to come down. Then, with reinsurers’ preferences all available at the same time, Tremor can identify an optimal solution to the cedent’s placement puzzle considering price, coverage quality, and even reinsurer relationships.
In short, Tremor’s modern Panorama process solves the complexity of syndication to bring the level of effort into line with the value created. Tremor’s Panorama dramatically reduces the time required to determine optimal pricing, allocation, and terms – contract wording is negotiated more efficiently, then pricing and placement are finished in days.
Four months is a long time to negotiate a contract that isn’t dramatically changing. If you want to learn more about how Panorama can shorten renewal periods driving optimal outcomes based on data, we’d be happy to give you a demo or answer your questions. Reach out to us!