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Re/insurers’ increasing use of structured solutions to persist: S&P

20th September 2019 - Author: Luke Gallin

Analysts at S&P Global Ratings expect global insurers and reinsurers to increasingly leverage structured solutions to mitigate exposure to legacy business and prune unprofitable non-core products.

S&P Global RatingsThe global re/insurance market remains competitive and challenging, and as a result, it’s expected that companies will continue to strive for improved risk-adjusted returns by turning their focus to their core business.

A testing, competitive operating landscape has forced global property and casualty (P&C) players to adjust their strategies in order to improve efficiency and ultimately operate under more desirable risk/reward metrics.

In a new report, S&P notes that one way re/insurers have adapted in recent times is with an increased focus on structured solutions, such as loss portfolio transfers (LPTs) and adverse development covers (ADCs), for their legacy liabilities.

The ratings agency states that so long as these structured solutions are well executed, they can provide benefits for both cedents and reinsurers.

“Cedants can lower earnings and capital volatility while reducing capital requirements. And reinsurers can enhance their business profiles and earnings by leveraging their underwriting and claims expertise while strengthening their client relationships,” said S&P Global Ratings credit analyst, Saurabh Khasnis.

Both LPTs and ADCs have the potential to enhance a cedents financial risk profiles and creditworthiness. For reinsurers, S&P states that offering structured solutions provides the potential to form long-term partnerships with cedents with more bespoke pricing when compared with more traditional risk transfer solutions.

However, the ratings agency underlines the importance of these solutions being well executed and well managed, warning that failure to do so can weaken a reinsurers’ creditworthiness and also result in challenges for cedents as they retain the ultimate risk of policyholder claims.

Looking forward, S&P expects re/insurers to increasingly leverage structured solutions, and also highlights IBT laws introduced in the U.S. as another, potentially more comprehensive form of risk transfer.

IBT works in a similar way to a Part VII transfer in the UK, offering complete economic, operational and legal finality on business transferred to a reinsurer. However, the ratings agency says that in order for this to become a widely used comprehensive restructuring tool, a more consistent adoption of IBT laws is required across all U.S. states.

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