Today’s hardening market is challenging for so many reasons. Reinsurers are suffering from catastrophe fatigue and Covid losses. They are projecting rate increases but their rate expectations are not uniform. Primary insurers may decide to retain more risk rather than pay higher prices for protection, despite the fact that this would increase capital constraints. By far, the worst part about today’s hardening market is the uncertainty that comes from a lack of coordinated information.

This week, the 2020 Nobel Prize in Economics was awarded jointly to Paul R. Milgrom and Robert B. Wilson “for improvements to auction theory and inventions of new auction formats.” The award highlights the power of auction technology to solve real-word problems. Mechanism design, which includes auction design and related topics, has received considerable attention from the Nobel committee, which previously awarded the prize to Al Roth and Lloyd Shapley for their work in 2012.

Reinsurance purchasing is a huge black box for management teams. There is no way of knowing the market clearing price for protection. Instead, reinsurance purchasers determine pricing with individual negotiations, incomplete data and educated guesses. So executives spend millions of dollars on protection without complete market information. This is just one of the five key mistakes made by reinsurance buyers. Tremor Technologies helps reinsurance buyers avoid mistakes like this by leveraging our “smart market” platform to price and clear transactions competitively.

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.

Oversubscription happens in a reinsurance program when the capacity needs of the buyer – the cedent – are exceeded by the capacity offered by the sellers – the reinsurers. It is a basic economic phenomenon that if a product sold-out while there were still more parties willing to buy it, then alternatively the product’s price could have been raised to the point where it sold-out at the exact moment when all buyers had purchased their fill.