sigma 5/2016: Strategic reinsurance and insurance: the increasing trend of customised solutions

Reinsurance and insurance markets are changing rapidly. Insurers around the world have become increasingly sophisticated in managing their capital and risks.

Consolidation, evolving solvency regulation and the spread of enterprise risk management are driving a trend of centralized re/insurance buying by insurance companies and large corporations, tailored to enable growth and steer group-wide risk appetite across all types of risks.

There is a growing trend toward more holistic and customised use of reinsurance and insurance solutions.

The demand for structured and more strategically-motivated re/insurance programs is growing across the industry. Risk transfer is a fundamental premise of any re/insurance transaction, including customised solutions, but the rationale for the use of such solutions has evolved into three broader motivation areas.

Increasing the efficiency of risk transfer

Structured re/insurance programs can increase the efficiency of risk transfer by combining multiple risks and/or interdependent triggers. As part of a more integrated risk management process, risk transfer is focused on the joint distribution of all risks, helping to expand the insurability of difficult-to-insure risks. It can also provide large amounts of capacity for catastrophe risks, which can be a challenge for some smaller re/insurance carriers in particular.

Optimising capital structure, reducing cost-of-capital and improving capital efficiency

Reinsurance can also be used for corporate finance purposes, that is, to address capital management issues. Cost-of-capital and capital efficiency have become increasingly important in the current and ongoing low-yield, low-growth environment, and reinsurance can substitute traditional capital and also cut the cost of paid-in capital by reducing earnings volatility. Corporate finance-oriented solutions include non-life retrospective covers and life in-force monetization, with the goal of releasing ‘trapped’ capital and monetizing future expected cash flows on long-term business.

Enabling strategy and growth

The third motivation for the use of customised solutions is to enable the strategic and long-term growth objectives of a ceding insurer. In the life sector, reinsurance contracts such as quota share treaties can  help an insurer finance the high first-year expenses and negative cash flows associated with the growth of new business. In the more capital intensive non-life insurance sector, growth support via reinsurance is more focused on flexible, on-demand capital relief and capital efficiency. In addition, the insurer may benefit from the reinsurer’s technical and market knowledge.

Strategies for success

The use of customised structures to achieve longer-term corporate finance and strategic goals can be a multi-year process. For instance, an insurer can start with a standard reinsurance package. Over a number of years and step-by-step, the insurer can build the program into a more comprehensive structure to support a broader set of goals, such as helping management to reassure investors, not only about protection against specific losses, but also by reducing uncertainty around financial performance, lowering the cost of capital and increasing return-on-equity.

In all instances, successful transactions are based on close alignment among all stakeholders, which can include insurer, reinsurer, broker and regulator. A number of factors contribute to a successful strategic reinsurance agreement, including clear objectives, senior executive sponsorship within the cedent, experienced deal teams, large risk capacity, long-term relationships, and best-practice accounting, tax and regulatory compliance. Lastly, transparent communication among all stakeholders in a transaction is critical.

Facts & Figures

Mapping of strategic/customised reinsurance solutions types


sigma Strategic reinsurance and insurance: the increasing trend of customised solutions

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