The ultimate goal of reinsurance is to reduce their exposure to loss by passing part of the risk of loss to a reinsurer or a group of reinsurers.
With reinsurance, the insurer can issue policies with higher limits than would otherwise be not allowed, thus being able to take on more risk because some of that risk is now transferred to the reinsurer. The reason for reinsurance is the number of insurers that have suffered significant losses and become financially impaired.
Over the years there has been a tendency for reinsurance to become a science rather than an art: thus reinsurers have become much more reliant on actuarial models and on tight review of the companies they are willing to reinsure. They review their financials closely, examine the experience of the proposed business to be reinsured, review the underwriters that will write that business, review their rates and much more.
The insurance company may be motivated by arbitrage in purchasing reinsurance coverage at a lower rate than they charge the insured for the underlying risk, whatever the class of insurance. In general, the reinsurer may be able to cover the risk at a lower premium than the insurer because:
1. The reinsurer may have some intrinsic cost advantage due to economies of scale or some other efficiency.
2. Reinsurers may operate under weaker regulation than their clients. This enables them to use less capital to cover any risk and to make less prudent assumptions when valuing the risk.
3. Reinsurers may operate under a more favourable tax regime than their clients.
4. Reinsurers will often have better access to underwriting expertise and to claims experience data, enabling them to assess the risk more accurately and reduce the need for contingency margins in pricing the risk
5. Even if the regulatory standards are the same, the reinsurer may be able to hold smaller actuarial reserves than the cedant if it thinks the premiums charged by the cedant are excessively prudent.
6. The reinsurer may have a more diverse portfolio of assets and especially liabilities than the cedant. This may create opportunities for hedging that the cedant could not exploit alone. Depending on the regulations imposed on the reinsurer, this may mean they can hold fewer assets to cover the risk.
7. The reinsurer may have a greater risk appetite than the insurer.
Alliance’s Reinsurance practice which started in year 2011, focuses on client objectives and helps to develop a comprehensive view of the risk and the best way to transfer in in the line with those objectives.
Currently this practice is divided into two major areas – Facultative and treaty.
On the facultative front, Alliance partners with various global reinsurers and enjoys pre-agreed placement facilities and expertise on various lines of business like standalone terrorism, Marine Cargo, Jeweller’s Block, Mega Projects and liabilities.
Alliance’s Treaty team enjoys cumulative experience of 60+ years and works very closely with both public and private sector insurance companies. As Treaty reinsurance brokers, it addressed the underwriting and capital objectives of clients on a portfolio level, align them to more effectively manage the combination of premium growth, return on capital and rating agency in interests.
Alliance’s Reinsurance Advantage –
The insurance company may want to avail itself of the expertise of a reinsurer, or the reinsurer’s ability to set an appropriate premium, in regard to a specific (specialized) risk.
The reinsurer will also wish to apply this expertise to the underwriting in order to protect their own interests.
Creating a manageable and profitable portfolio of insured risks
By choosing a particular type of reinsurance method, the insurance company may be able to create a more balanced and homogeneous portfolio of insured risks.
This would lend greater predictability to the portfolio results on net basis (after reinsurance) and would be reflected in income smoothing. While income smoothing is one of the objectives of reinsurance arrangements, the mechanism is by way of balancing the portfolio.