recoverables associated with the large catastrophe events of the past several years and, generally, we believe that the willingness to pay of some reinsurers and retrocessionaires is
declining. Therefore, this risk may be more significant to us at present than at many times in the past. Complex coverage issues or coverage disputes may impede our ability to collect amounts we believe we are owed.
A large portion of our reinsurance protection is concentrated with a relatively small number of reinsurers. The risk of such concentration of
retrocessional coverage may be increased by recent and future consolidation within the industry.
We also sell retrocessional reinsurance
to other reinsurers. See We are exposed to counterparty credit risk, including with respect to reinsurance brokers, customers and retrocessionaires below for certain counterparty risks that may be associated with this business.
We depend on a few insurance and reinsurance brokers for a preponderance of our revenue, and any loss of business provided by them could adversely
affect us.
We market our insurance and reinsurance products worldwide through a limited number of insurance and reinsurance
brokers. As our business is heavily reliant on the use of a few brokers, the loss of a broker, through a merger, other business combination or otherwise, could result in the loss of a substantial portion of our business, which would have a material
adverse effect on us. Our ability to market our products could decline as a result of the loss of the business provided by any of these brokers and it is possible that our premiums written would decrease. Further, due to the concentration of our
brokers, which has increased further following the closing of the TMR Stock Purchase, our brokers may have increasing power to dictate the terms and conditions of our arrangements with them, which could have a negative impact on our business.
We are exposed to counterparty credit risk, including with respect to reinsurance brokers, customers and retrocessionaires.
We believe our exposure to counterparty credit risk has increased in recent years. In accordance with industry practice, we pay virtually all
amounts owed on claims under our policies to reinsurance brokers, and these brokers, in turn, pay these amounts over to the insurers that have reinsured a portion of their liabilities with us (we refer to these insurers as ceding insurers).
Likewise, premiums due to us by ceding insurers are virtually all paid to brokers, who then pass such amounts on to us. In many jurisdictions, we have contractually agreed that if a broker were to fail to make a payment to a ceding insurer, we would
remain liable to the ceding insurer for the deficiency. Conversely, in many jurisdictions, when the ceding insurer pays premiums for these policies to reinsurance brokers for payment over to us, these premiums are considered to have been received by
us upon receipt by the broker, and the ceding insurer is no longer liable to us for those amounts, whether or not we have actually received the premiums. Consequently, in connection with the settlement of reinsurance balances, we assume a
substantial degree of credit risk associated with brokers around the world.
We are also exposed to the credit risk of our customers, who,
pursuant to their contracts with us, frequently pay us over time. We cannot assure you that we will collect our premiums receivable from ceding insurers and reinsurers to whom we sell retrocessional reinsurance or our reinsurance recoverables from
our own reinsurers or retrocessionaires, which may not be collateralized, and we may be required to write down additional amounts in future periods. To the extent our customers or retrocedants become unable to pay future premiums, we would be
required to recognize a downward adjustment to our premiums receivable or reinsurance recoverables, as applicable, in our financial statements. We have significant reinsurance recoverables, and our failure to collect even a small portion of these
recoverables, or a meaningful delay in the collection of recoverables as to which our own underlying obligations are due, could negatively affect our results of operations and financial condition, perhaps materially.
During periods of economic uncertainty, our consolidated credit risk, reflecting our counterparty dealings with agents, brokers, customers,
retrocessionaires, capital providers, parties associated with our investment portfolio, and others may increase, perhaps materially so.
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