Baden-Baden 2018 Day 2

A great theme and a happy hunting ground for many stories for us Insiders at the Baden-Baden meetings of the past has been the phenomenon of large global buyers centralising their reinsurance spend.

The inexorable trend of the past two decades has been for the likes of Allianz, Zurich, Generali, Liberty Mutual and AIG

to reinsure their branches centrally and then aggregate and control external reinsurance buying for optimum group efficiency.

When globalisation began accelerating in earnest in the 1990s these firms acquired entities all over the world, but the only thing truly global about them was their consolidated annual group accounts, which stretched to hundreds of pages.

As these groups have properly integrated their global entities, they have become more sophisticated and have begun to realise the vast capital efficiencies that are available to them.

But this has been a parallel process. You can’t have global buyers without global sellers and sophisticated global brokers to advise, structure and place the business.

Back in the 1990s there weren’t any global reinsurance brokers and the reinsurers they placed business with were also only global in name and not cohesive entities.

Back to the future in 2018 we have global buyers, global brokers and global reinsurers – game on. At first the game was a slightly frightening one for reinsurers because it was all about savings.

The first rule of volume is that it always earns a discount. The second rule of globally diverse volume is that it earns a second, compound discount on the discount. Reinsurers had the right to feel a little battered and bruised.

But the more sophisticated of them saw an opportunity. The newly sophisticated buyer needed and valued an equally sophisticated seller with the right financial resources to support them. There was a fair trade – reinsurers got nicely packaged and balanced books of business, offering unspectacular but steady returns.

Sophisticated buyers are not generally opportunistic ones. They are around for the very long term and they want their reinsurance counterparties to be equally solid. Both parties know each other’s costs of capital and return hurdles and know what a fair price for a deal is going to look like long before negotiations start.

Thus reinsurance at this level has returned to its traditional partnership equilibrium.

Reinsurance works best when there is symmetry. When reinsurers are too big it is their cedants that can suffer, but when the buyers are too big it is the reinsurers that are squeezed by the asymmetrical relationship.

In the past when new big-cedant demand came into the market reinsurers were often suspicious of getting burned, but these days there is less reason to look a gift horse in the mouth. Today such buyers’ motives are more transparent.

So when you read in these pages that demand from big buyers is up, it will be of no surprise to their most trusted counterparties in the reinsurance world and it should be of less consequence or alarm to the market than it was in the past.

Capital management has come to the fore for these cedants and reinsurers are well prepared. They have sophisticated capital relationships of their own that are ready to respond and mop up the new demand.

But don’t be confused, this world of global sophistication isn’t actually where most of us live – it is still a small island of relative calm amongst oceans of chaos.

The rest of us are still scrambling like crazy to keep our heads above water as this, the toughest of all soft markets, continues to drag us down.

To view the second of our special issues from the 2018 Baden-Baden meeting, please click here.