It’s the opportunity cost of holding the capital required to support the line. The more reinsurance purchased, the less volatile the results, and the less capital required. However, no one has come up with a good way to quantify this theoretical amount, which makes any definitive pronouncements like Aon’s a little suspect.
This reads to me like a reinsurer’s sales pitch. Not that there’s anything wrong with that…but it seems to claim that the solution to reduced ROE is to buy more reinsurance. Meanwhile, the actual stats in the article seem to point to poor investment returns as the major factor. So…yeah.
Historically the insurance carriers were able to operate at a slight loss because the investment income was able to compensate for the difference. The new insurance environment must take into account the overall economy, so the model is readjusting. Investment income is not as reliable as it once was, so the underwriting and true premium costs must begin to stand on their own in a way they have not had to. AON’s findings are not new at all.
Florida pulls down the average, because of repressed rates and high reinsurance costs.
Texans pay the highest Homeowners rates in the nation. That started back in 2000 with the “mold is gold” rush of claims. No slow down since then.
I wish the article could have defined the “true cost of capital” and what that cost is.
The true cost of capital is [(the amount paid in premiums)]minus [(the amount paid in losses) +(the underwriting expenses)].
@ Blue, Thank you. I take it then the article’s reference was to the true cost of reinsurance?
It’s the opportunity cost of holding the capital required to support the line. The more reinsurance purchased, the less volatile the results, and the less capital required. However, no one has come up with a good way to quantify this theoretical amount, which makes any definitive pronouncements like Aon’s a little suspect.
This reads to me like a reinsurer’s sales pitch. Not that there’s anything wrong with that…but it seems to claim that the solution to reduced ROE is to buy more reinsurance. Meanwhile, the actual stats in the article seem to point to poor investment returns as the major factor. So…yeah.
Historically the insurance carriers were able to operate at a slight loss because the investment income was able to compensate for the difference. The new insurance environment must take into account the overall economy, so the model is readjusting. Investment income is not as reliable as it once was, so the underwriting and true premium costs must begin to stand on their own in a way they have not had to. AON’s findings are not new at all.