31 March 2014News

Opportunistic multi-year purchases spiked in past year

There has been a marked increase in insurers tempted to buy “opportunistic” multi-year coverage in recent months, as they have sought to lock-in pricing during the current soft cycle.

That is the word from Damien Smith, underwriting director, Bermuda at Hiscox, who tells Bermuda:Re that while some clients are making multi-year purchases in order to “smooth the effect of volatility in market pricing”, others are looking to take advantage of present market conditions.

“We have seen a definite increase in demand for multi-year coverage over the last 12 months as clients seek to lock in rates that have softened.”

This has led to more deals and more discussions concerning multi-year coverage, as reinsurers have sought to respond to rising demand among insurers.

“At Hiscox we are willing to sell such coverage, but limit the amount we write in any one zone. This means that we are not unduly exposed to a sudden upswing in market rates, but by having some multi-year deals we increase the stability of pricing in our inwards portfolio.”

Reinsurers have been forced to juggle the pressures of the cycle, with the necessities of long term relationships with clients.

Insurers have also sought to eliminate exclusions, with a general “push to broaden coverage” evident in the current cycle, says Smith.

“In the property reinsurance market for example, there have been requests for foreign terrorism in the US and to a lesser extent workers’ compensation or personal accident losses, arising from natural catastrophes” to be included in wider coverage.

Insurers are looking to remove such exclusions as they look to take advantage of what many have described as a buyer’s market.

Conditions have not been helped by fierce competition among reinsurers, says Smith.

“Traditional markets have been fighting hard to hold on to business and there is a lack of underwriting discipline evident at present.”

He says that while some have cited rising levels of convergence capital as the lead driver behind the competitive dynamic, his impression is that it has “contributed to the softening market, but is not entirely to blame”.

In response to conditions, Smith says that Hiscox has sought to focus in on product innovation as a means to differentiate its offering, rather than competing solely on price. And it appears that the buying behaviour of insurers supports such a focus.

As Smith explains, in the current market cycle “some buyers are holding their reinsurance budget steady and are thus able to buy some more limit or wider coverage. Others are reducing their overall spend, but not many are increasing their reinsurance spend.”

Reinsurers will need to be flexible and intelligent in their provision of coverage if they want to maintain their position in the present tough market cycle.