Patrick's Masterclass - Video n°5
(French & English subtitles avalaible directly on YouTube)
Hi everybody 👋
I am Patrick.
Today we shall play a videogame called PARTNERSHIP. In all games not every player is following the same rules
Over time they may be changed to the point that the game turns quite different
Let’s start! ⏬
Long term shift to short or from “everlasting love” to “your love is like a see saw”
1975
- Partnership between insurers and reinsurers was like long lasting marriages.
- There were hardly any legal disputes.
- Long term was equal to security, stability for everyone including investors.
- Some hail insurance cies were signing 5 years contracts with their reinsurers leaving any renewal discussions to the end of that period.
- It was difficult to set up a new relationship as most companies had a policy not to cancel partnerships from their own initiative
- Confident personal relationship between insurers, reinsurers and brokers were a paramount feature. - The return was +/- secured over the well accepted ups and downs of years.
- Pay back was the normal consensus between partners.
- Prices, terms and conditions were usually the same, one differentiator being on some markets a relationship either on a direct basis or through brokers.
- Part of the relationships was often cemented with reciprocal deals lasting years, renegotiated every year depending on results but conceived to be win-win on both sides.
Today
- Marriages are not lasting that long.
- Legal disputes and arbitration processes are frequent.
- Results are more volatile, margins squeezed, and pay-back consensus has waned.
- Personal relationships have lost importance though, luckily, they remain of value.
- Non-proportional contracts: one-year fixed duration, renegotiation every year
- Proportional contracts: the tendering of a Provisional notice of cancellation (PNOC) is a customary practice even in the most traditional markets.
- “Price optimization” approach has replaced” Long term” one among many buyers
- Capacity providers sell their “agility » and « anti-cyclical management” to their investors, promising good returns, what clients may see as an “in and out policy”.
- Terms and conditions including prices are more frequently differentiated
- Difficult to mix such language with the words “global approach”, “consistency” “reliability”
Understanding clients’ needs, sharing views and offering solutions which appear a fair win-win approach, remain a key driver, beyond price, for a differentiation between competitors.
Tomorow
“Power to the people”: A difficult balance /
Organizations so tightly ruled that innovation, agility, risk daring are so constrained that they can hardly move, will lose their key talents, and fail.
Organizations flexible enough to empower teamwork, and who follow an analytical long-term view ahead of the short-terms challenges will be the winners.
- ERM: Flexible or not Organizations are bound to have proper ERM rules to face the expectation/requirements from Supervisory authorities and rating agencies
- ESG: is and will be a growing concern/pressure/cost for (re)insurance companies
- Money will join the CEOS having clear strategic views, the talents to enforce these and the organizations flexible and well controlled enough to keep the right balance and follow a soundtrack through headwinds and tailwinds.
Long lasting commitment vs run off/LPT or “should I stay should I go”
1975
- A reinsurer taking a commitment was supposed to keep it until it elapses. A claim could be pending for years the liability assumed was registered accordingly in its accounting books, until the case was settled.
- In case of cancellation of a contractual relationship there was a provision in the contract to fix the conditions of a loss portfolio withdrawal or natural expiry at the option of the ceding company.
- Lloyd’s syndicates were the only ones used to have a RTC (reinsurance transaction to close) relieving them from their commitments after 3 years.
In the meantime
- The US Casualty crisis of the eighties (Asbestos, Environment Liabilities) with negative development of reserves has led a number of cies to look for solutions, ADC (adverse development covers), retroactive ones… or transfer of books to dedicated cies
- Enstar today’s biggest legacy cy was created in 1993
Today
- The loss portfolio transfer (LPT), the selling of books of business the run-off of which will be handled by dedicated legacy companies has become a common feature both at the level of insurance and reinsurance companies.
- This does not apply only to companies facing financial difficulties forced to put their book in run-off but has become a common tool to arbitrate the best possible use of capital, manage return and solvency ratio.
- It is considered as an agile capital management tool without any further consideration of the commitments taken towards your clients, insurance companies or insureds.
- When talking about players of our industry, I did not mention the legacy companies taking over books to handle the run-off of liabilities, big mistake!
- A growing number of actors have entered this market over the recent years with an increased number of transactions year by year and the capital dedicated to this activity has grown along with the development of this activity.
- These transactions exceed now frequently Bios $ in terms of value.
- The overall estimated run-off P&C liabilities traded by legacy cies are estimated today at 960 Bns $ coming from 790 Bns $ in 2019.
The past seems to have a bright future for this fast-developing activity! But competition on price, inflation, financial uncertainties are a few challenges to face.
Cancellation clause
1975
- Provisional notice of cancellation clause, (PNOC), part of the contracts, was not so much used, reinsurers tendering PNOC for valid reasons to renegotiate terms.,
- A PNOC could be felt by the partner as an offense. I learnt about one who decided to reply by considering this PNOC as a definite one much to the despair of the reinsurer!
- Waiving of the contractual delays for a PNOC was one way to alleviate the impact of a PNOC considered to be too rude.
- In case of a disagreement to renew in view of experience, terms and conditions, changes in underwriting or placing policy… the provisional notice was turned into a definite one.
- Extraordinary cancellation clause was mainly related to either breach of duty from one of the parties, war, or in case of the partner having financial difficulties, losing part of its capital, being overtaken by another company …
There was no provision of cancellation for a downgrade below a minimum rating level
Today
- A downgrade clause is provided in every contract and used frequently. Traditional partnerships cannot cope with this head cutting process.
- New partnerships, new tools:
- New investors, pension funds, hedge funds have appeared beginning of the years 2000 offering their financial power to cover Cat Property Risks through different tools Cat Bonds, ILW (Industry Loss warranty) …
- Over the years their role and market share has increased, and they have spread the range of risks they may cover.
- This type of relationship which requires a very strict contractual definition of risks, assumed or not, with a short-term duration, is conceived as a single short-term shot.
- Should this first shot works properly it is quite possible for the partners involved to renew the established relation with new contracts and terms.
Summary
- The « long term » approach for partnership still exists today but the number of actual believers has reduced
- Global book approach takes sometimes priority over a client-by-client view making the partnership word more difficult to remain vivid.
- This statement may be a bit pessimistic. Fortunately, we keep on enjoying proofs of players sticking to fairness values and long-term approach as the best way.
Bye for now 👋
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