No-one wants a fool for a counterparty

What makes a good (re)insurance counterparty?

Obviously, they must be solvent and willing to pay. More importantly they need to give you the confidence that they will remain solvent and friendly into the foreseeable future.

They need to be a party you respect and whose opinion you value. Sending them business should be something you prize – as an opportunity to have a second expert opinion of your strategy and risk management.

They should have integrity and you should be able to trust them. They should be competitive and their products should represent good value for money.

One last thing – they should be reasonably profitable.

Desirable (re)insurance counterparties can rarely be substantially cheaper than market and they can never be cheaper than cost.

A loss-making counterparty is a long-term worry for a buyer.

No-one respects someone who makes a habit of losing money – it makes them look like they don’t know what they are doing. Why would a buyer seek such a party’s opinion on a sensitive matter of business?

Basic maths also means that habitual loss-makers can’t be financially strong for long. They will eventually need to recapitalise if they wish to remain solvent.

Neither can habitual loss-makers be at the head of the queue when that recapitalisation needs to happen. Capital will flow to those that generate profitable returns, not those that have made investors’ money disappear.

That is why it makes no sense for markets to worry about whether remedial underwriting actions to restore the underlying profitability of an account will drive business away, never to return.

Lloyd’s decisive recent remedial actions have made some players openly worry that once business has found alternative homes, it will be lost forever. Brokers talk of finding alternatives.

But it is far more important to restore profitability – indeed there is no alternative.

The most toxic episodes in the London market, and indeed in any market’s history, have always been when they have developed a strongly negative reputation for being a place where poor underwriting decisions take place and losses have become ingrained.

The vicious circle is very hard to counteract because the moment that the poor counterparty needs to substantially increase pricing coincides exactly with the absolute nadir in their reputation.

Why should the worst underwriter earn the highest price rises?

In any diverse marketplace there are always poorly run, greedy, deluded and foolish counterparties with which to transact business on terms that will favour you in the short term.

The problem is that overusing or becoming reliant on such na?ve capacity is as dumb a strategy on the part of the buyer as it is for the seller. One day the harsh reality dawns that there are no fools left to switch into your programme and you are vulnerable.

In short, there are always chumps to be taken advantage of – but if you do so under anything other than exceptionally short-term and highly-controlled circumstances, the long-term chump is likely to be you.