How do Insurance Companies Select Reinsurers?

The reinsurance market is very competitive market. After the increase in globalization and privatization, companies from all across the world are now allowed to compete in the reinsurance business in most parts of the world. In most cases, this generally means that the reinsurer is spoilt for choice.

Nowadays, most cedant insurers receive several quotations from interested reinsurance companies. However, they need to select a single or a few reinsurance companies with which they conduct their business. Obviously, there are certain factors that are taken into account by almost all cedant insurance companies in the world when it comes to selecting a reinsurance service provider.

In this article, we will have a look at some of the most important factors which are taken into consideration by cedant insurance companies when they select a reinsurance service provider.

1. Financial Strength: Financial strength is obviously the biggest factor that is taken into account by most cedant insurance companies while selecting a reinsurer. It is important to note that even though financial strength is considered to be important, it is a differentiating factor only to a certain extent.

   To a certain extent, ceding insurance companies will consider all reinsurance service providers to be the same and choose based on other factors. It is for this reason that there are rating agencies such as Standard and Poor, Fitch, and Moody’s which rate almost every major reinsurance company in the world.

   However, ceding insurers do not completely rely on the work of rating agencies. It is a known fact that they themselves conduct their due diligence in order to ensure that they are selecting the right counterparty.

2. Claims Payment Ratio: When ceding insurance companies select reinsurance partners, they want to make sure that the partners not only have the capability to pay claims but also the willingness to do so. One of the best ways to find out about this is by looking at past claims’ payment ratios.

   An abnormally low claims payment ratio means that the reinsurance company uses legal loopholes built into the contract in order to try to avoid paying claims when they become due.

   Most reinsurance companies have to publish their claims payment ratio because the regulators make it mandatory for them to do so. This allows ceding insurers to have the right information they need while selecting a reinsurance partner.

3. Underwriting Expertise: When ceding insurance companies select their reinsurance partners, they generally try to get a partner who has a lot of underwriting expertise. This is done in order to benefit from the experience that the reinsurance partner has.

   There is generally some amount of data sharing between the reinsurance company as well as the ceding insurer. However, choosing a reinsurance company with high underwriting experience can be tricky since this could also mean that the reinsurance company does not underwrite the risky business that the ceding insurer already has on its books or asks for a huge premium to do so.

   On the other hand, an inexperienced reinsurer may unwittingly take excessive risks and may fail to pay up when the damages occur due to financial distress or bankruptcy. It is for this reason that reinsurance companies with a stellar underwriting track record are generally preferred.

4. Local Market Knowledge: The reinsurance industry is indeed a global industry. However, there is no denying the fact that the reinsurance business is conducted very differently in different parts of the world.

   In many parts of the world, local regulations as well as market practices tend to be very different. It is for this reason that ceding insurance companies want to ensure that their reinsurer has the experience of doing business in a certain geographical location.

   If the particular reinsurance company is new to geography, then there is a high chance that it may face difficulty adapting. This could lead to possible disputes and litigations which ceding insurance companies try to avoid at all costs.

5. Underwriting Strategy: Last but not the least, ceding insurance companies try to carefully understand what the strategy of the reinsurer is in the long run. They want to know whether the reinsurance company’s corporate objectives are in line with that of the ceding insurance company.

   For instance, if the reinsurance company wants to enter the primary insurance market as a service provider in the near future, it might not be a good company to partner with. Similarly, if the reinsurance company is scouting the market for possible merger and acquisition targets, then its financial situation could change significantly. As a result, they may not be a good fit for a ceding insurance company.

   There are many such factors that the cedant insurance company needs to consider while thinking about the long-term repercussions of partnering with a reinsurance firm. There is no such thing as a good or bad strategic partner. It is all about the right fit which depends upon the objectives of both the firms

Hence, it can be said that selecting a reinsurance service provider can be a daunting task. The ceding insurer needs to do a lot of due diligence and sift through a wide variety of data in order to ensure that they make the right decision. However, it is important to get this decision right since it can a reinsurance company is a strategic partner.