Looking to the numbers in marine treaty

Ed’s Chris Jones says it will be up to cedants and their brokers to differentiate each story and present the necessary granularity of their submission.

‘Granularity’ is a new theme for marine treaty reinsurers. As they negotiate 2021 renewals, they will be asking to see the most granular data possible, and digging deeper than ever before into ceding companies’ risk and loss figures.

Cedants may wish to flex the old assumption that premium is a proxy for risk. They may argue that income is down, so exposures must be down. That used to work, but such arguments are unlikely to satisfy treaty reinsurers this time around. Instead they will want to see tangible evidence of where premium is down, and why it has reduced. They may ask for an explanation, line by line, to prove that exposures have measurably reduced.

Similarly, reinsurers will look closely at loss records. Cedants should be prepared to present “as-if” positions, particularly in hull and cargo classes. Proportional treaty underwriters, and those assessing lower-end excess of loss treaties, may step up their use of analytics to make these analyses, and catch up with better-modelled catastrophe treaty programmes.

Cedants will be expected to demonstrate how they have managed their claims - an area, in earlier times, reinsurers typically showed little or no interest - and to highlight any measures taken to address loss experience. Even following treaty underwriters can be expected to ask questions about claims.

All of this is intended to lead to better pricing in a disconnected market that has struggled recently to deliver satisfactory returns on capital. Up the chain, marine retrocession markets have been seeking price rises of 15 to 25 percent, and primary underwriters 5 to 10 percent (numbers which no doubt will change as renewals gather pace). Primary reinsurance rates have also been rising, but not by as much as many expected.

Reinsurers will be sifting through the data on risk and claims to narrow the gap between higher- and lower-level markets.

During the previous two renewals, marine reinsurers wanted greater rate increases than they were able to achieve. As a result, the pricing disconnect is now quite big. It will be an issue during renewal negotiations, as reinsurers dig heels in to ensure they get what they need this time around.

“Cedants will be expected to demonstrate how they have managed their claims – an area, in earlier times, reinsurers typically showed little or no interest”

True, a significant amount of capacity – especially from non-aligned Lloyd’s syndicates – has run for cover, but meanwhile many other marine reinsurance markets are expanding their capacity. These carriers have spotted an opportunity in hardening rates, tighter terms and conditions, and a communicable disease exclusion, and are opting to double down (not chase it down).

Reinsurers’ determination and application of data analysis will be seen to guide not just rates and commissions, but also terms and conditions. No one is likely to offer preferential terms to any cedant, and no capital will allow coverage without disease exclusion. That’s good news: removing ambiguity from wordings is a positive for everyone, since uncertainty often ends up in court.

Coverage and pricing will be the focus of forthcoming renewal discussions. It is up to cedants and their brokers to differentiate each story, and to ensure they present the necessary granularity of their data submission. Those that have stuck with a stable panel of reinsurers over the years may enjoy the benefits of their loyalty through a level of amelioration in rates, or tweaks and enhancements to coverage, but the numbers will write the ultimate conclusion.