Marcell: Reinsurance industry must articulate benefits of buying casualty cover

The reinsurance industry needs to do a better job of convincing insurance carriers of the value in being consistent and long-term buyers of casualty covers at a time when there has been a trend for some cedants to retain more business net, according to Aon’s Reinsurance Solutions CEO Andy Marcell.

Speaking to this publication as part of #ReinsuranceMonth, the executive noted that there are several insurers that have the balance sheet scale to be able to retain more risk.

That in turn could shift the supply and demand economics of casualty reinsurance and create an easier buying environment for those still looking to buy cover.

“I think it’s incumbent on the reinsurers and the brokers to be able to articulate what the benefit is of buying casualty protection over time,” said Marcell.

Buying the product can deliver capital relief, reserve benefits and enable insurers to manage cycles by having a continuous ceded reinsurance strategy in casualty, he suggested.

Looking ahead to the upcoming renewal season, the executive said it was questionable whether there is much room left for widespread increases in cede commissions on casualty and professional liability quota shares, with improvements for buyers likely seen on a case-by-case basis.

As previously reported, renewals over the last year have seen an uptick in cedes on a number of accounts as buyers have been able to argue the case that the significantly improved economics of the business being ceded in terms of pricing, limit profile and terms warrants higher commission.

Marcell said: “I’m sure there’ll be pressure because it’s a commercial decision for most buyers in a rating environment they see as very strong.”

But he added that if rates on the underlying business are seen as moderating next year, then it will be difficult for buyers to make the argument that reinsurers should continue to pay more cede commission.

The executive added that the key question will be whether rates remain sufficient to keep ahead of loss-cost trends.

“In casualty most of the clients have moderated their limits and they’ve got more rate, so they’re actually getting a better return for the volatility and the risk they’re taking on their books, which enables them to keep more risk,” he added.

Against that, though, Marcell said insurers recognise that casualty business goes through a cycle and it is important to maintain reinsurance relationships and manage capital.

The flip side of retaining more risk to benefit from improved pricing is that an insurer would also be assuming more reserve risk.

“So they’re still going to be looking to buy similar structures to what they bought in the prior year,” the executive suggested.