Reinsurers could place lines of business at risk by failing to properly investigate the financial profile of cedants before taking on their risks, Litmus Analysis warned.
Proper investigation into ceding companies’ financial position is an integral but often overlooked part of the reinsurance underwriting process.
“There’s a general consensus among reinsurers that this is an important part of the reinsurance process, but generally with little clarity about how important or what to do about it,” said Litmus.
Analysts highlighted that it’s not uncommon for carriers’ to run into financial difficulty, and this can have severe repercussions for reinsurers: “Yet just last year in the UK, two fairly high-profile primary carriers ceased underwriting due to financial duress, and the UK is not alone.
“Those of us with grey hair know the trail of problems that can leave behind, although, of course, mostly for policyholders and brokers.”
Reinsurance underwriters show a trend of focusing on superficial risks, instead of the broader financial picture of the firm.
However, looking at a cedants’ overall financial health becomes more important the closer the reinsurer is to “following the fortunes’. If you’re writing their long-tail Quota Share, it should be highly important; if you’re just at the top end of the cat programme, less so.”
Litmus analysts warned that “there have been many occasions when the sister company or parent has failed and brought the whole business down with it.
“So the underwriter’s a bit like a knee surgeon doing the operation without checking that the patient’s heart is up to it.”
Even if a cedent’s treaties have performed well historically, if the firm comes under financial pressure it could cause underwriters to compromise on underwriting standards, and otherwise safe contracts to be undermined.
If insurers lose face within the wider market, loss of business can quickly snowball to the ultimate detriment of the reinsurer: “Equally, when issues are apparent externally, their policyholders or brokers may become more selective in the business they offer to them.
“Any or all of these can lead to a ‘failure slide,’ starting with writing for income and aggressive renewal negotiations.
“Then if/as/when they go out of business, the investment in building the relationship is lost, any chance of pay-back has probably gone, the credit risk in terms of premiums receivable increases, and ultimately you might find the liquidator on your doorstop insisting you settle outstanding claims even though you haven’t had the premium.
“My advice would be that if you want to buy the apartment, check out the neighbourhood…” said the analysts.
