Capital Solutions for Life 2009

Greg Solomon, Head of Structured Life Reinsurance Solutions, discusses how Swiss Re can work with Life & Health clients to develop solutions to enhance their capital management programmes.

He describes our value proposition as offering a wide variety of reinsurance products and financial services solutions to manage capital and risk. The concept of using reinsurance to help manage a life company's risks is well known, and particularly since the global financial crisis, capital management has been pushed more into the limelight – including in Asia. For some clients this capital management aspect of reinsurance is certainly not new.  Indeed for Swiss Re we have been executing such deals successfully over the past decades and delivering tens of billions of Dollars, Yen and Pounds of capital relief for some clients.

Capital under strain

During 2008, the volatility (and general downward trend) of financial markets around the world weakened companies' balance sheets. Many players in the financial services industry saw their asset values fall even as the value of their liabilities actually rose, putting a huge financial strain on their balance sheets, and thrusting capital management onto the radar for top management. This was also evident across Asia – where the impact of the global market collapse was less severe than in the West, but was still substantial. Almost all companies suffered declines in their solvency levels; a number of life companies were purchased; many others received capital injections from their parents, while others shut completely to new business.

These were not losses from pandemics or natural catastrophes:  the problem went beyond “risk” in the usual insurance sense.  Instead it was the weakening financial markets and generally falling interest rates which ate into the insurance industry’s solvency capital, which in turn affected policyholder behaviour with significant increases in lapsing or surrendering of life policies. Life insurers needed a way to deal with the impact of the crisis. To meet these needs, Swiss Re began to highlight to clients the capital-driven solutions which would aid with those depleting solvency levels.  In fact, some of these solutions are well-known traditional risk management tools (such as quota share structures) which have gained greater interest throughout the crisis thanks to their ability to release regulatory capital onto the balance sheet. Alternative methods of capital relief, such as structured reinsurance financing transactions, also gained traction especially as they were available even as banks withdrew traditional debt instruments required for capital-raising. 

Furthermore, reinsurance solutions delivered a favourable cost comparison and offered significant flexibility. The demand for reinsurance financing treaties which could help boost a company's statutory solvency surged in the second half of 2008 and persists unabated into 2009, as companies continue to manage their balance sheet in a world where capital remains scarce.  Swiss Re’s Structured Life Reinsurance Solutions (SLRS) team, which has global responsibility for structuring reinsurance transactions with Life & Health clients which focus on capital management, has continued putting a number of reinsurance financing treaties in place. Although Swiss Re has always been very busy writing financing treaties, the desire to transact with us for capital support and to get a solution in place by financial year-end, was significant. The Swiss Re SLRS team worked through the closing months of 2008, even to the point of signing last two treaties on 31 December 2008.

Designing solutions for Asia’s capital management needs

Swiss Re has written Life & Health financing treaties in many markets across Asia Pacific, and the team is actively working on solutions in a few Asian markets where the use of financial reinsurance has historically been restricted. Here are some key observations from this experience.

It should be noted that such transactions are not for desperate companies who have no other options. Sometimes the purpose of the reinsurance financing is simply to boost a company’s solvency by accelerating future surpluses which are trapped in the conservative valuation basis of a regulatory accounting regime. Such in-force treaties allow a company to generate capital from its existing business, without having to resort to their shareholders for more money, for example. This approach can also reduce the average cost of capital for that company. On other occasions, when companies are growing very rapidly, the new business strain can place a heavy burden on a company’s balance sheet. Reinsurance financing again allows the company to generate regulatory capital from within, secured against future surpluses expected under this business.  This structure has the advantage of delivering just the right amount of capital at just the right time, hence capital efficiency is improved. And of course, since many Asian insurers have parents in countries outside Asia, it is possible to design treaties that have the desired impact, both locally as well as group-wide, which match the increasing trend towards global capital management.

It is not uncommon in Asia for regulators and auditors to have to approve such a transaction before it can be used to generate capital for the company. It is therefore important to keep an open relationship with such parties and engage them early on in the process where required.  This helps ensure that the structure works as intended, and that the treaty is available to produce the desired capital impact for which the insurance company has planned. While the SLRS team specialises in capital-motivated reinsurance solutions, it does not work in isolation – instead the team accesses local knowledge and experience in order to understand the client’s motivation, local regulations and conventions, and to produce the optimal structure from both companies’ point of view.

Ongoing support on the ground

Across Asia, for example, Swiss Re’s local teams maintain close relationships with the life companies in their markets – and are certainly most connected to local regulations, accounting frameworks, etc. So when treaties are put in place, it represents a genuine shared effort between capital specialists, client relationship teams and local experts. Such capital solutions are not new for Swiss Re, with its decades of experience in these structures. Many clients can testify from experience that reinsurance financing is about optimising a company’s capital position, while benefiting from the flexibility and cost advantages offered by such deals. Having generated many billions of dollars of capital on insurance company balance sheets over the years, and with plenty of capital to continue to write new reinsurance financing treaties, Swiss Re is in the ideal position to continue to work with insurers and develop solutions to enhance the capital management programs of life companies, in Asia and across the world.

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