At the 2018 AGRiP Leadership and Governance conference in San Diego, we discussed the effects a reinsurance disruption can have on public entity pooling. This was a reminder of GEM’s importance as a strategic partner, in the context of your long-term reinsurance needs.
As risk managers, we think of risks in various categories. The one that concerns us most is the low-frequency, high-severity event. It might be an earthquake, windstorm, flood or terrorism, for example. Disruption in the insurance and reinsurance markets is also a low-frequency, high-severity risk. We have no way of knowing if or when it will occur, but we know from experience the financial impact. After all, this was the event that led to the creation of public entity pooling. Is enough attention being given to reinsurance disruption?
Let’s be honest, it’s hard to imagine such a disruption on the heels of an extensive soft market. Many refer to the current conditions as the new normal, and they may be right. However, there are no guarantees. Hard markets emerge with little warning. The cause might be a macro-economic event or a series of insured catastrophes, a loss of appetite by reinsurers for public entity sector exposures, or your own pool’s adverse loss experience.
So, what might be the impact of reinsurance disruption on your pool and your members? Your members will face a higher cost of coverage and/or less coverage. In an extreme situation, where there is no reinsurance available for certain events, either your pool retains the entire risk or your members go uninsured.
Preventing a hard market isn’t an option, but mitigating the impact is. Think of this in the context of your strategic planning: one of the Threats in your SWOT Analysis could be “volatility in the reinsurance markets.”
So, what are ways in which you can mitigate the impact of reinsurance disruption?
- Consider reinsurance structures that accommodate flexibility. One such structure is to have multiple reinsurers in a quota share arrangement
- Be prepared to take a higher retention
- Use alternative reinsurance like a captive insurance company or a reinsurance pool such as GEM . These work well in tandem with your existing reinsurance arrangements, but can be ramped up in the event of market disruption
What’s important is that you not wait for disruption to occur; by that stage, your options will have narrowed significantly. Establish a plan and take pro-active steps. Some of these are low-hanging fruit, whereas others require more lead time:
- Enhance your reinsurance relationships. Improve your pool’s story and show how it is different
- Have a vision of what your future state might look like
- Deploy a more flexible reinsurance structure
- Evaluate your pool’s ability to retain additional risk
- Be informed on Alternative Reinsurance by doing your due diligence in advance. Educate yourselves on who the players are and if they are a good match for your pool
- Embed the threat of a market disruption into the generative thinking of your Strategic Plan; this should be part of governance
If you buy into the possibility of another hard market and you acknowledge the potential impact, then you recognize this as a risk that needs to be managed. Through deliberation and planning, you can be prepared for this event and mitigate the risk to your pool and your members.
President & CEO