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Terms & conditions show signs of weakening in 2017: Fitch

18th May 2017 - Author: Luke Gallin

The persistent soft reinsurance market environment is again resulting in the weakening of terms and conditions (T&Cs), as market participants increasingly utilise multiyear protection, extended hours clause, and the inclusion of risks that aren’t fully understood by the industry, according to Fitch Ratings.

Throughout the softening reinsurance market cycle there have been reports of weakening T&Cs as cedents look to take advantage of the buyers market environment and reinsurers fight for market share in a highly competitive, and overcapitalised sector.

At the same time, some reinsurers were seen to fight back against weakening T&Cs and showed discipline at renewal seasons, an important sign of market maturity and sophistication during industry turmoil.

Analysts reported at the start of last year that when compared with 2015 terms were better during renewals, but analysis from Fitch suggests some are again looking to offset the adverse impacts of the soft market, with T&Cs again weakening in 2017.

“Terms and conditions continue to weaken in 2017, including use of multiyear covers, extended hours clauses, inclusion of terrorism and cyber coverage, and reinstatement in the same event wordings,” said Fitch.

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For cedents, securing a multiyear contract at desirable terms, effectively locking in pricing, is a benefit of the softening reinsurance market cycle, enabling companies to secure efficient and broad reinsurance protection. This trend is becoming more common in the space, as cedents look to secure efficient reinsurance protection before any turn in the market does occur.

However, for reinsurers it limits the ability to renegotiate rates and terms should the market cycle shift.

The inclusion of unmodeled, and risks that are yet to be fully understood by the insurance and reinsurance industry is nothing new, but with the increasing threat of cyber and terror events around the world it’s becoming more and more dangerous for cyber cover, for example, to be included in a non-cyber policy as a way of securing business.

Ill-defined and not properly understood exposures such as cyber and terror are far-reaching and by their very nature highly unpredictable. And with firms reportedly including these types of risks in an effort to secure business at renewals, there’s a risk that some could get hurt should a large cyber attack take place, as seen recently with the huge ‘WannaCry’ ransomware breach.

Discipline remains key in the current, challenging reinsurance operating landscape, but the temptation to weaken T&Cs in order to secure business at more desirable metrics is perhaps proving too much for some in the space. With the mid-year renewals not too far away, it will be interesting to see how disciplined the reinsurance sector is, and whether T&Cs continue to weaken further in 2017.

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