I made a statement in yesterday blog that I am doubting the Authenticity of the document floating in social media since the minimum rates were made part of an XOL treaty. Few students called me to ask what the logic of my above statement was?
In proportional treaties, cession is based on Original Gross Rates. Hence, underpricing in OGR may be corrected in proportional treaties by introducing the minimum rates. Having said this, I completely agree with Hari Radhakrishnan comment to my yesterday blog that attaching minimum rates (which also will be the maximum rates), we can no longer call it a treaty. As he said, it is like a binder.
Normally we say that Treaty is blind -what is becoming clear is treaty is no longer blind. We also say, reinsurer is giving away his underwriting pen to the reinsured since the reinsurer assessed the underwriting standards and capabilities of the reinsured. With introduction of minimum rates, underwriting pen is no longer being handed over and there is no longer a trust in the underwriting standards and capabilities of the reinsured.
Coming back to my yesterday comment on oddity of minimum rates in XOL treaty:
XOL treaties are not following the OGR. Reinsurers have priced the XOL treaties and reinsured have paid the demanded premium. While pricing any underpricing prevalent in the direct market is considered. Hence, almost at the fag end of the treaty, introducing an amendment seems odd to me. It does not mean that XOL reinsurers will not benefit from increased prices. Increased prices will lead to higher GNPI and hence higher premium payment even in XOL at the time of adjustment.
Another statement made in that contract amendment is “anything not priced as per minimum rates cannot be ceded to treaty”. What is being expected? That the reinsured will identify those risks they underpriced and not add to the GNPI?
Finally, will European reinsurers follow with similar amendment to the treaties where they lead?
In my view, European reinsurers will be too concerned about anti-trust complaints and hence will not follow with similar amendment. In fact, the European reinsurers need not do anything. National Re is either leader or follower in almost all treaties. Since the amendment is applicable even for follow-share, European Reinsurers can silently benefit without taking the risk of getting accused of Anti-Trust violations.
Win-Win for all:
Reinsurers
Insurers
Brokers (higher commission).
Who is losing? Risk Managed customers? or is it PROPERTY UNDERWRITING which is the biggest loser?
