What it means
When an insurer wants to cover a big risk, such as a portfolio of property policies in a hurricane zone, it often places the cover with several reinsurers rather than just one. The lead reinsurer is the first to quote, usually with the largest line (share), and its terms form the template for the whole panel.
The other participants are called followers, because they accept the lead's pricing and wording, sometimes with small adjustments. Being the lead carries real responsibility.
The lead reinsurer examines the underlying risks, models the likely losses and negotiates the wording of the contract with the insurer and its broker. Followers rely on that work and may do far less analysis of their own, which is why a respected lead can make it much easier to fill a placement.
For the insurer buying cover, the lead matters because its credibility affects the price and the speed of the placement. A strong lead with a long track record encourages followers to join quickly and at fair prices.
A weak or unknown lead may leave the cover under-subscribed or priced higher than necessary. The lead is paid for this role in several ways.
It usually receives its share of the premium like any other participant, and it may also receive a lead fee or a slightly better commission in recognition of the extra work. It usually also takes the first position in handling claims discussions, with followers agreeing to be bound by its settlement decisions.
A finance professional should note the concentration risk. Heavy dependence on one lead means the insurer's reinsurance programme is exposed to that firm's financial strength and willingness to renew.
Credit ratings, collateral and diversification across several reinsurers help manage that exposure.
In practice
Real-world examples.
Example
A regional property insurer places a catastrophe cover with five reinsurers. A large international reinsurer leads with a 40% share, and four others follow with 15% each. The insurer's reinsurance manager uses the lead's quote to open negotiations with the rest.
Example
A marine cargo insurer renews its programme after a year of heavy shipping losses. The lead reinsurer asks for a higher rate and tighter terms, and the followers adopt the same changes. The insurer's finance team revises its cost of reinsurance upward in the budget.
Example
A start-up insurer writing cyber risk for small firms struggles to find anyone willing to lead its first treaty. Once an experienced reinsurer agrees to lead with a 30% share, other reinsurers sign up within days. The start-up credits the lead's reputation for making the placement possible.
Formula
Calculation
Reinsurer's premium = reinsurer's share % x total reinsurance premium. Reinsurer's loss payment = reinsurer's share % x ceded loss
An insurer buys a reinsurance treaty with a total premium of $2,000,000, and the lead reinsurer takes a 40% share. The lead's premium is 40% x $2,000,000 = $800,000. A year later, a catastrophe produces a ceded loss (the part passed to reinsurers) of $3,000,000. The lead's loss payment is 40% x $3,000,000 = $1,200,000, so the lead pays out $400,000 more than it collected, while the remaining 60% of the premium and loss is shared among the followers.Case study
Seen in the real world.
Northshore Mutual is an illustrative, fictional insurer that writes homeowner policies along a stormy coastline and needs $50,000,000 of catastrophe reinsurance each year. In the past its broker approached six reinsurers separately, which took weeks and produced six different sets of terms.
This year the broker secured a lead reinsurer willing to take 30% of the cover, or $15,000,000, and to agree the wording first. The remaining 70% was filled by four followers in nine days instead of five weeks, and the average premium rate was 4% lower than the prior year. The illustrative lesson is that a credible lead saves time, reduces price friction and gives the buyer a single party to deal with on key terms.
Watch out
Common mistakes.
- Assuming the lead reinsurer bears all the risk, when it only takes its own agreed share and the followers carry the rest.
- Treating followers as passive, when each reinsurer remains responsible for its own share and its own credit quality.
- Choosing a lead on price alone, without considering its financial strength, claims-paying record and willingness to stay on the programme.
Questions
People also ask.
Does the lead reinsurer always have the biggest share?
Usually it has the largest or one of the largest shares, but what defines a lead is that it sets the terms others follow.
How is the lead different from a broker?
The broker is an intermediary who arranges the placement, while the lead reinsurer is a risk-taker that puts its own capital behind the deal.
Why do insurers care about reinsurer credit ratings?
Reinsurance is only worth as much as the reinsurer's ability to pay, so a weak rating raises the chance that a recoverable claim is not collected.
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