Article of the Month - Time to Negotiate

The owner of a new captive insurance company usually lacks the experience of buying reinsurance, especially when dealing with the few sophisticated reinsurers that exist in today's market.

The concentration of market share, whether it is in Bermuda, London, Europe or US, has resulted in the captive owner having to retain reinsurance consultants to manage the process of buying reinsurance as the cost of reinsurance has sky rocketed.

This increase was not contemplated in the original feasibility studies for captives. Recently, captive owners have had to retain experienced reinsurance litigation attorneys because their captives have not been able to collect reinsurance recoveries due from both solvent and insolvent reinsurers.

This is a new experience for them. They must be educated in the process of properly documenting the reinsurance purchase process. They must understand what makes an effective reinsurance proposal:

• How detailed should the actuarial study be in the reinsurance presentation?
• How is the reinsurer reacting to the reinsurance proposal?
• Why was our proposal sent to reinsurers with an historical track record of litigating reinsurance recoveries?

Many captive owners need to be informed on how the cost of reinsurance is promulgated.

Before you sign

In the reinsurance-buying process, the owner is at a disadvantage when dealing with experienced reinsurance company executives. If they are using a reinsurance intermediary, they should understand completely the negotiated brokerage commissions payable by professional reinsurers, and how they differ by type of reinsurance arrangement.

Does the reinsurance intermediary have access to all the reinsurance markets? It is a historical fact that all reinsurance programmes for captives need to be continually evaluated and restructured based on a number of factors. Such factors include historical documented loss experience, entry of new reinsurers in the reinsurance market and the downgrading of professional reinsurers. As the owner, when was the last time you had a complete re-evaluation of your existing reinsurance programme? How do you, as the captive owner, keep informed as to the new strategies for buying captive reinsurance? Have captive owners formed a reinsurance committee, similar to what the National Association of Independant Insurers had done in the past? Today its meeting under the new name property and Casualty Insurers (PCI), has become the premier meeting in the country whereby the subject of buying reinsurance is discussed hour after hour.

Hold the key

On the subject of reinsurance security, too many captive owners rely on the rating organisations as their sole criteria for reinsurance security approval. Few have a reinsurance security committee within the corporation that meets and goes over reinsurance company financials. Since there has been significant growth of captive companies in the past 25 years, and reinsurance programmes have been profitable business for reinsurers, captive owners need to take a more active role in the negotiation process of buying reinsurance, especially if they are to return to their corporation owners an attractive rate of return on the corporation's investment.