I agree that reinsurance rates should reflect current expenses of reinsurers. But the loss component of rates raises the age old debate about banking profits in good times to cover losses in lean times versus taking higher risks each year. By my experience, it seems that reinsurance and insurance rate price elasticity has been biased toward decreases rather than increases. That bias is due to market competition, politics, and regulatory involvement on the direct insurance end. Longer term pricing mechanisms covering multiple years may yield stable prices and fair ROEs. Allowing markets to properly price risks, with regulatory intervention only for obvious abuses, would also achieve similar results over time.
I agree that reinsurance rates should reflect current expenses of reinsurers. But the loss component of rates raises the age old debate about banking profits in good times to cover losses in lean times versus taking higher risks each year. By my experience, it seems that reinsurance and insurance rate price elasticity has been biased toward decreases rather than increases. That bias is due to market competition, politics, and regulatory involvement on the direct insurance end. Longer term pricing mechanisms covering multiple years may yield stable prices and fair ROEs. Allowing markets to properly price risks, with regulatory intervention only for obvious abuses, would also achieve similar results over time.