Retrospective solutions: Where legacy and reinsurance meet

Compre’s David Presley and Simon Hawkins on the rise of the retrospective market.

In recent years the retrospective market has evolved considerably, relieving (re)insurers of unwanted prior-year liabilities (PYL) in new ways and in greater volumes. Some recent transactions would not have been possible five years ago, yet the conditions now exist for further significant advances in the next two years.

While retrospective solutions are many and varied, they essentially fall into two categories. The first are the traditional M&A projects. These are often huge and resource-intensive for both client and retrospective provider, frequently involving discontinued lines following a strategic extrication from a market or territory.

The second, which is much newer and far simpler, is more akin to a reinsurance product, providing an economic and/or operational solution to PYL where a carrier wishes to remain in a particular market.

Such solutions mark a significant step forward and are an increasingly important part of (re)insurers’ capital management toolbox. They have also paved the way for the retrospective market to play an even more important role in reinsurance capital management and on a cyclical basis. When looking at capital business plans, (re)insurers have generally tended to look forward, yet more are developing capital management teams with both prospective and retrospective remits. The desire to optimise the deployment of capital, maximise return on total capital and redeploy prior-year capital into a hardening market is propelling the market’s next evolution – from strategic exit tool to cyclical capital management solution.

While this promises to provide greater opportunity at both an individual carrier and a market level, it will test retrospective providers’ own resilience. Those that prove to be robust, long-term partners will bear several distinctive hallmarks.

Currently, retrospective reinsurance remains an opportunistic product; it is not possible to deliver a pre-designed business plan where the market supply allows for a diverse selection of risk. So building a balanced, diversified portfolio requires a disciplined approach to the opportunities that are presented. Rigorous due diligence is essential, asking the right questions – and a lot of them. Having deep underwriting skills backed by sector-specific expertise to write complex risks competently is also vital. Developing specific areas of focus and centres of excellence will become increasingly essential to maintain and build resilience.

Claims excellence will become even more significant; legacy players must ensure they handle claims better and in a more focused manner than their clients. Focus on claims remains unequivocally within the DNA of the retrospective market – paying claims swiftly, allocating greater resources and focus to accelerate run-off and help the broader insurance market recycle capital. This is fundamental in fostering genuine partnerships and vital in maximising long-term mutual benefit.

Attracting and retaining the best talent will also be required for all in our market to take the next evolutionary steps. It is untrue to say providers are reliant on a small specialist talent pool, with companies increasingly demonstrating the ability to attract top talent from across the (re)insurance market.

After decades on the periphery, the retrospective market is quickly becoming an increasingly embedded part of the (re)insurance industry. There now exists the very real and exciting opportunity to forge more meaningful long-term partnerships, which will further strengthen the reinsurance market and have a highly desirable knock-on effect for the resilience of the insurance industry as a whole.

David Presley is CEO of North America and Simon Hawkins CEO of Europe at Compre