May 7, 2007

The Cost of Low Reinsurance Rates

I was happy in the haze of a drunken hour
But heaven knows I'm miserable now
--- The Smiths

Satisfaction with reinsurers has dropped from 67% in 1995 to 15% in 2005.

Why? Underwriter Ross Morton of RGA and actuary John McKay of PPI provided answers at CALU XVI earlier today.

More Reinsurance Fewer Reinsurers
The amount of risk reinsured has grown from 0.4% to 80%. The number of major reinsurers has dropped in Canada from 11 to 3.5 (RGA, Munich Re, Swiss Re, and the smaller Optimum Re). Guess what happened to YRT reinsurance rates? Let's look at males.
  • 1975: $4.00 (per $1,000)
  • 1981: $2.32
  • 2001: $0.72
  • 2007: $0.37
These rate drops were not as jarring when Ross presented them during his keynote at the Canadian Reinsurance Conference in April 2006. He spoke just after lunch but maybe wine was served first :)
The reinsurers have been in a price war, spurred by . There are consequences from low prices:
  • less service
  • less flexibility (e.g., for foreign travel, avocations, market capacity)
  • more audit of insurer underwriting practices (as of 2002, an estimated $3 trillion of risk was in the wrong classes in North America)
  • less profitability for reinsurers
  • less training for underwriters
  • loss of expert underwriters
The last major sale of a reinsurer took place in 2004. ING Re, the fastest growing US reinsurer, was sold for ($800) million: Scottish Re was paid $800 million to take the business.

Maybe our clients are better served with (slightly) higher reinsurance rates and more service?

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