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Reinsurance purchase driven by capital management: Deloitte

19th April 2017 - Author: Staff Writer

Reinsurance purchase by life and P&C companies appears to be on the upswing – a reversal of the previous four-year trend of decline – as insurers’ capital management optimization strategies evolve, Deloitte said in a recent report.

Key strategic reasons for Life companies’ purchase of reinsurance in the next years are outlined as corporate capital management, ROE targets, ALM considerations, and liquidity LGMT.

For P&C companies, the major drivers include ROE targets, diversification, and ALM considerations, with counter party diversification and other benefits also quoted as significant influencers.

This contrasts with the past three years’ trend where product earnings and reinsurance expertise were top drivers, as well as catastrophe for P&C companies, – showing a major shift in incentives for reinsurance purchase as insurers become more sophisticated in use of reinsurance and search for cost-efficient methods of addressing changes to regulatory requirements.

Deloitte commented that “repricing, a recognition of a new “ROC reality,” and creative use of embedded derivatives (tying reinsurance to potential future rate moves) are helping parties from both sides.”

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Describing factors that have contributed to the shift in motivations for reinsurance purchase, Deloitte said;  “Increased pressure on ROC, for example, motivated by regulatory and economic concerns, left less room for ceding companies to “share” with reinsurers, and there was a perception that reinsuring was only occurring at a relatively high cost.

“However, repricing, a recognition of a new “ROC reality,” and creative use of embedded derivatives (tying reinsurance to potential future rate moves) are helping parties from both sides overcome this challenge.”

Offshore reinsurance has typically been driven by the need to eliminate redundant reserves and free up domestic capital, while for P&C writers, Deloitte suggested the main motivation has been the need for more efficient capital management in home office locations (primarily in Bermuda and across Europe).

However, statistics show a drastic reduction in life premiums ceded since 2013, due to “regulatory uncertainty surrounding AG 48 and PBR implementation.”

Whereas for P&C insurers, Deloitte said its “observed the use of offshore reinsurance generally declining but maintaining a tighter range from 2011 to 2015.”

The financial consulting firm added that the reinsurance industry reflected a similar pattern of change to the wider finance industry – driven by global macro economic conditions.

This recognition of a shift from product earnings and expertise to capital optimisation now driving reinsurance purchase has been repeated by industry experts within the reinsurance arena – in a recent report on capital optimisation, Scor commented; “To date, capital management solutions have focused on one-dimensional actions, aimed mostly at calibrating capital at the right level in a rather static way.

“But as insurers are progressively becoming more sophisticated in relation to capital management, economic-based regulations (such as Solvency II) are acting as further catalysts, and the focus is moving towards risk-based capital frameworks.

“Within risk-based frameworks, reinsurance solutions (whether traditional or structured) are positioned as efficient capital optimization tools, acting on both the capital available and the capital required.”

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