--- title: Back to basics! description: The overcapacity in the Reinsurance sector and the general “short-termism” pressure are driving Reinsurance away from its fundamentals. image: https://blog.arundore.com/hubfs/GettyImages-1180187740-png.png --- [![Arundo_Logo_RVB-1](https://blog.arundore.com/hs-fs/hubfs/Arundo_Logo_RVB-1.png?width=115&height=76&name=Arundo_Logo_RVB-1.png)](https://www.ccr-re.com/en/home) - [News](https://blog.arundore.com/en) - [Reinsurance Tutorials](https://info.arundore.com/reinsurance-tutorials) - [Women of Power](https://info.arundore.com/women-of-power) - [MTPL Losses France Study](https://info.arundore.com/assessing-the-losses-of-severe-personal-injury-victims-in-motor-liability-cases) - [Arundo Re Talks](https://www.arundore.com/en/arundo-re-talks) - [français-FRANCE](https://blog.arundore.com/fr/back-to-basics) [Home](https://blog.arundore.com/) [The reinsurance and insurance blog of Arundo Re](https://blog.arundore.com/en) Back to basics! 22 October 2020 2 min read # Back to basics! ## The overcapacity in the Reinsurance sector and the general “short-termism” pressure are driving Reinsurance away from its fundamentals. The players are gradually forgetting some of these principles: a necessarily global risk approach and a necessarily long-term relational approach. Regarding risk mutualisation, the example of the evolution of CAT prices during the last few years of heavy losses is striking. Some insurers have again refused an increase in their rates on the pretext that the last hurricane/typhoon had passed within a few kilometres from their exposure zone and did not affect them. In some earthquake-prone countries, the global tariff does not include any dedicated premium for natural disasters, arguing that the payback in case of earthquake would be managed a posteriori.   ![People](https://blog.arundore.com/hubfs/GettyImages-1180187740-png.png)   These rationales are contrary to the spirit of Solvency II, which expects the reinsurer to be solvent at all times and underwriting exercises to be balanced each year. It’s worth recalling that the reinsurer is not there to pay in place of the insurer but is there to allow him to spread over time the burden of a major claim that is settled immediately. It is easy to understand that if everyone does not get involved in the mutuality, it will inevitably be necessary for everyone to pay their own risk premium, which is contrary to mutualisation. Geographical mutualisation goes hand in hand with temporal mutualisation. The rarer the frequency of a claim and the greater its amount, the more the mutualist approach must prevail over individualism.   As for the relationship with reinsurers, the changes observed in the conception of proportional quota share treaties are enlightening. At its most basic, this type of treaty is there to provide the insurer with additional capacity to enable it to develop further by "borrowing" capital from reinsurers. It is usually associated with the notion of "follow the fortune" in good and bad times. It requires a high level of trust between the players and induces a long-term relationship. In this context, the commission paid by the reinsurer must reflect its fair share in the acquisition of the business and thus contribute to a fair “follow the fortune”. What do we see instead? This commission has gradually become a variable for adjusting the tariff. Some have increased to over 40%. So where is “the follow the fortune” spirit, when the commission exceeds the insurer's acquisition costs by more than 10%? Or when some contracts limit the reinsurer's gain with a 90% profit sharing?   The good track record of a treaty is often put forward to justify these changes in conditions. This argument works as long as the contract is not exposed to very long cycles. Comparing past results and 2020 results of treaties impacted by the Covid crisis or by the dramatic explosion in Lebanon will prove it.   What are the consequences of overcapacity and "short-termism" in reinsurance? Unable to reconstitute their reserves sufficiently, reinsurers have instead protected themselves by limiting their offer, by imposing limits, sub-limits and exclusions. In doing so, they no longer fully play their role, refusing high volatility rather than giving access to a wider mutualisation.   All players in the sector must resist the temptation of the “short termism” and reverse the trend of the vicious cycle "less premium, less service, less mutualisation ...". Otherwise who will cover - and with what premium - the upcoming pandemic, the future CAT events that will inevitably be more frequent because of climate change, the conflagration that will destroy half of a major capital city, the first cyber systemic disaster or any other scenario we have not yet thought about? States?   **Written By**   ![Hervé_Nessi_VIGNETTE](https://blog.arundore.com/hs-fs/hubfs/Vignettes%20rondes/Vigettes%20ronde%20gouvernance/Herve%CC%81_Nessi_VIGNETTE.png?width=44&name=Herve%CC%81_Nessi_VIGNETTE.png)   [***Hervé Nessi***](https://www.ccr-re.com/en/w/discover-us/gouvernance/herve-nessi/)     ---   ## Did you like this article? 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