The Renewal That Doesn't Fit the Manual
A mid-sized regional insurer, Cedar Valley Mutual, has ceded property business to your reinsurer for six years under a quota share with a 60% cession and a 5% ceding commission. At renewal, Cedar Valley's new CFO asks for the cession to rise to 75% and the commission to rise to 9%, citing two years of elevated catastrophe losses and a shrinking surplus. Their loss ratio to the treaty has run 71%, 68%, and 82% over the last three years; the last figure includes a single hail event that drove 30 points. The underwriter on the account notes Cedar Valley has been slow to file two large claims and has not yet returned the most recent bordereau. The treaty renews in 45 days. Your pricing model supports the current terms but not the requested ones without a rate action on the underlying book.
1. The CFO frames the request as purely a capacity issue. How should you reframe the conversation, and what should you ask for before responding to the numbers?
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Reframe from 'how much capacity' to 'what risk are we sharing and at what price.' The 82% loss ratio is not a trend signal if the hail event is removed-the underlying run rate is closer to the 68–71% band-so the ask is being justified by volatility, not deterioration. That is a legitimate concern but it points to structure (cat load, event limits, reinstatements) as much as to cession and commission.
Before quoting, request: (1) the outstanding bordereau and a written explanation of the two slow claims, since ceded loss development affects the true loss ratio; (2) the current catastrophe model output and any change in their aggregate exposure; (3) confirmation of rate action on the underlying book, because higher cession plus higher commission without underlying rate improvement simply transfers margin. Make clear the commission ask is a profit-sharing question, not a capacity question.
2. You can offer 70% cession at 6% commission with a catastrophe event limit and one reinstatement, or hold at 60%/5% and lose the account. How do you decide and how do you present it?
Read the worked answer
Decide on expected margin, not on retention anxiety. Model both options: at 75%/9% with a 71% underlying loss ratio and no rate action, the treaty is likely at or below break-even once expenses and cat load are included; the extra 15 points of cession buys volume but imports volatility you are not being paid for. The 70%/6% package with an event limit and one reinstatement keeps you in the relationship while capping the tail that produced the 82% year.
Present it as a package tied to conditions: the event limit addresses the hail-type scenario, the single reinstatement prices the second event, and the 6% commission is a step toward their ask contingent on documented rate action and clean bordereau delivery. Be explicit that walking away is a real option if the conditions are not met-credibility comes from a stated walk-away, not from flexibility alone.