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This page contains a single entry from the blog posted on January 24, 2007 3:32 PM.

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Hurray for composite pricing

Dear friend,

“Subject to most favoured reinsurer’s terms” I haven’t heard that since my broking days!

The EU competition commission has just published with an interim report into Business insurance in Europe.

Most of its 164 pages seem to be about teaching the uninitiated about how the (re)insurance market works in Europe (which, of course is essentially exactly the same as anywhere else in the civilised world!)

As such has no value whatsoever to you and I.

But many thanks to my colleague Marcus Alcock for wading through the tedious Eurocrat flab and babble and finding a point of interest, which he duly put up on our news site.
(It’s on Page 87 of the report, if you want the full version)

Over to the EU report and “most favoured reinsurer’s terms for dummies”:

“At different stages in the negotiation of a reinsurance contract, certain reinsurance companies insert a clause to the effect of benefiting from the best terms available to the
participating reinsurers on this contract, without quoting these terms. Our inquiry shows that this clause can appear in treaty as well as in facultative reinsurance. It can be written directly on the contract or appear through the stamp of the reinsurer. It can be imposed by one or several of the participating reinsurers

The clause appears in many different ways. It can be a short text like:

"Subject to best terms and conditions"
"Subject to most favoured reinsurer terms and conditions"
"Warranted no better terms carried"

So far, so darned obvious. Now on to the nitty gritty:

“By lifting the impact of these differences on the final premium paid by the reinsured, this type of clause contributes to maintaining higher premiums in the market than under fully competitive conditions.

“Moreover, this type of clause increases price transparency and can, under certain market conditions, amount to a restriction of competition within the meaning of Article 81(1) EC”

So it might be anti-competitive, might it?

Of course it’s anti-competitive! Naming one price and insisting on another higher one quoted by your competitor is hardly honourable. And it expresses a complete lack of confidence in one’s own abilities as an underwriter.

But you can hardly blame reinsurers for trying it on. You don’t see people insisting on least favoured reinsurer’s terms, do you?

But if a builder came to your house and stuck a similar clause on the end of his quote, you’d never want to work to see him again!

There is no reason whatsoever why composite pricing shouldn’t soon become the norm in the market, especially with electronic trading becoming more cost-effective.

It would help with contract certainty, wouldn’t it? No more running around getting everyone to accept minor terms and conditions changes at the last minute.

But here’s a thought — subscription market-style uniform pricing may work against clients in hard markets, but it sure works in their favour in soft ones.

In a soft market a broker can use underwriters’ fear of being left off a placement to force least favoured terms to hold sway.

Composite pricing could actually help smooth the pricing cycle in the longer term.

Now there’s a final thought from a cynic:

In soft markets EU commissioners won’t think they can get any good publicity out of investigating (re)insurers!

After all, no-one moans when premiums go down.

Comments (1)

Jolzb:

Keep up the great work!

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