Frayed Relationships

Direct writers’ dissatisfaction with reinsurers is growing–fast

Direct writers and reinsurers are going through the bumpiest time in many years. Almost two-thirds of direct writers say relationships with their reinsurers are declining, according to a July 2005 survey of 225 direct writers conducted by Flaspohler Research Group, Kansas City, Mo. The firm does a new survey every 2 years.

This year’s survey shows that 61.5% of direct writers say their relationships with reinsurers are on the decline; 29.8% say their relationships are not changing; and 8.7% say they are improving.

The percentage of direct writers who are ‘very satisfied’ with reinsurers is “at an alarmingly low level,” according to the survey. Only 15.5% of cedants said they were “very satisfied” with life reinsurers in 2005, down from a high of 67% in 1995, the Flaspohler survey finds.

The survey reveals that 49.5% of direct writers were somewhat satisfied; 12.6%, neither satisfied nor dissatisfied; 18.4%, somewhat dissatisfied; and, 3.9%, very dissatisfied.

Among reasons for the increased dissatisfaction are aggressive rate increases, less willingness to compromise, general tightening of terms and consolidation in the business.

A total of 56.4% of direct writers say competitive pricing is the single most important factor when they buy reinsurance. This is followed by good relationships at 12.2% and services offered by the reinsurer at 10.5%.

In response to a question about the most critical issue facing direct writers today, 70.1% said consolidation of reinsurers was the top concern, according to the survey.

Direct writers say the top solution (with a 59.4% response rate) to capacity shrinkage is to do business with existing reinsurers that have not been used recently. Other solutions were a higher retention on quota share with a 42.2% response; use of excess reinsurance, 40%; use of new domestic reinsurers, 30%; increased use of offshore reinsurers, 12.9%; internal securitization, 11%; and external securitization, 10%.

The top 3 reasons that direct writers give for considering a higher reinsurance premium are: facultative services, 56.1%; capacity, 52.6%; and a strong existing relationship, 43.3%.

Rick Flaspohler, the firm’s president, says the results of the survey shocked him enough to have him repeat the part of the survey addressing direct writer satisfaction. Results were unchanged, he adds.

Flaspohler says he has done similar studies for different industries and has never seen satisfaction as low in those other fields.

He says he felt it was significant enough for him to rework a presentation that he is scheduled to make at the Association of Home Office Underwriters on Oct. 16.

The heart of the matter, according to Flaspohler, is that “the basic way of doing business is changing.”

There’s a perception, he says, that “the whole industry has gone from one that looks out for each other to one in which there are no exceptions.”

This, he continues, is a 2-pronged issue: the actual denial of claims and the fear that claims will be denied by a reinsurer. “The fear of having claims denied scares them [direct writers] to death.”

But this situation is not particularly surprising, according to Flaspohler, since other industry factors have changed, according to Flaspohler. Direct writers in many cases are acting as marketers of insurance, he says, passing on most of the mortality risk.

He adds that the number of reinsurers has shrunk.

Another factor Flaspohler looks at is “the inevitable question, perhaps, [of whether] basic life insurance is underpriced.” Producers, he says, have become accustomed to calling on their carriers to keep the price of life insurance low.

“In a lot of ways, it is like a marriage gone bad,” says Flaspohler, who adds that trust between direct writers and reinsurers has been diminished.

And since the industry is not going to get back to where it was and investment returns are not going to offset returns like they did in the 1990s, he says there will need to be more communication between direct writers and reinsurers going forward.

‘The basic way of doing business is changing’