Tremor, the programmatic insurance and reinsurance risk transfer marketplace, has released new data showing the cost of oversubscription on reinsurance placements.
Looking at data from transactions on its market platform, Tremor found that even a moderate oversubscription can have a significant impact on the cedent’s cost.
For example, a program that is oversubscribed by 25% is likely priced at least 10% above the price at which it would have precisely filled.
Oversubscription happens in a reinsurance program when the capacity offered by reinsurers exceeds the capacity needs of the cedent at firm order terms.
Tremor believes that oversubscription indicates that cedents are unable to optimally price their risk, forcing those who do transact to pay more and possible pricing other cedents out of the market entirely.
“We know that only a fraction of catastrophe risk is covered today,” said Sean Bourgeois, Founder & CEO at Tremor. “Reinsurers who aggregate globally will always be better-suited to bear risk than original risk holders, so it must be that risk remains uncovered as a result of transaction costs, overhead, and other barriers. Reducing these barriers significantly stands to substantially expand the global reinsurance market.”
“This inefficiency is large enough that eliminating it, as Tremor’s marketplace platform does, will meaningfully reduce reinsurance overhead and open the market to entrants,” added Chris Wilkens, Chief Product Officer at Tremor.
The Tremor marketplace finds market clearing prices by matching supply and demand while accounting for preferences and constraints, thereby avoiding the issue of oversubscription.
Tremor’s analysis is based on aggregate supply data from recent transactions on its platform, enabling it to identify the overpayment associated with an oversubscription rate for each product transacted on the platform.
“The inefficiency in today’s firm order terms process hurts both sides of the market,” Bourgeois continued. “Cedents directly experience higher prices since they must ultimately pay to cover the cost of any market inefficiencies. On the other side of the market, reinsurers costs are high because of the long and uncertain process of selling protection.”
“Eliminating the inefficiencies will benefit everyone and expand the market — current cedents will benefit from better pricing, new cedents will enter the market, and reinsurers will see enhanced returns through the combination of lower costs and increased cedent demand.”
