Executive Summary

Over the past 20 years, the reinsurance industry has experienced three profound forces for change. First, technological change has improved information distribution and strengthened connections between global markets. Second, regulatory emphasis on global equivalence in trading practices has generated pressure for convergence across different marketplaces. Third, the widespread acceptance of vendor property catastrophe models has led to more standardised approaches to the evaluation of reinsurance risks, levelling the playing
field for decision-making on at least some classes of business.

These changes have intensified competition between reinsurance markets. Reinsurance trading centres in remote geographic locations, such as Bermuda, where it is more difficult to transact business face-to-face, have been able to write risk via electronic communications and now have very significant positions in the global reinsurance market. Simultaneously, Lloyd’s of London, one of the original reinsurance markets that is still very much based on the face-to-face approach, has demonstrated its capability to weather financial shocks and downturns and remains an important player in global reinsurance.

These market-level changes are having two main effects on the practice of trading risk:
• They alter the basis of risk-pricing and decision-making from intuitive, face-based judgement to mathematical
modelling and ostensibly objective decision criteria;
• They shift the relationships that characterise the reinsurance market from individual, personal ties to more strategic business-to-business relationships.

However, there has been little systematic evaluation of the specific implications of change for either trading practices or for future industry evolution. This report addresses that gap by presenting the results of an
industry-commissioned, year-long study of reinsurance underwriting and broking practices in the Lloyd’s and Bermuda marketplaces.

The generic findings show that a market built around a central physical location, such as Lloyd’s, is valuable for business that requires face-to-face contact at the point of decision-making. However, much business can
be transacted through selective use of face-to-face interaction at prior stages in the process, rather than at the ‘point-of-sale’. Bermuda is an example of such a ‘transportable’ reinsurance market; markets can be established where regulatory and taxation conditions are favourable rather than necessarily being bound to a particular physical location.

The specific findings show how the selective use of face-to-face and electronic interaction can reduce inefficiencies and improve decision quality in either type of market.

The report covers four main areas. The findings in Section 1 illustrate areas of convergence but also substantive differences in workflow and risk evaluation between markets. Section 2 outlines six key learning points about redundancies and inefficiencies in both markets. Section 3 develops frameworks for relationship management, risk evaluation and selective application of face-to-face contact to address these learning points. In Section 4, the trading process is broken down into specific modules of activity, with recommendations for best practice in each module. Reinsurance firms and broking houses can use this modularisation process as a guide to evaluating and changing their current practices.