Monday, March 30, 2020

Reinsurance Strategy in The Market

The reinsurance market is a wholesale market for insurance and as in all markets is made up of buyers and sellers.

An insurance risk written by a direct company could be “sold” to a reinsurer who would then provide reinsurance cover on that risk. Alternatively, it could be seen that the reinsurer sold cover to the direct insurer. If this is the case then the reinsurer is the seller and the direct office is the buyer or cedant. The sellers or reinsurers are reinsurance companies, Lloyd's underwriting syndicates and direct insurance companies. The buyers or cedants are direct insurers, underwriting agencies, Llyod's syndicates and other reinsurers. Reinsurance is arranged either directly between the reinsurer and cedant or through an intermediary – the reinsurance broker.

The market exists to allow risks which are too large for a single insurer to be shared by a number of others, or as a means of further spreading the risk. As a wholesale market, it is usually only open to participants from the insurance industry. It is a highly developed and professional market and has developed its own way of doing business. As a result, involvement with the reinsurance market requires technical expertise and understanding. The services of a specialist such as a reinsurance broker are therefore normally required.

Dealing with the reinsurance market requires specialist assistance for both technical expertise and market knowledge. Expertise is required for the preparation and presentation of the risk to the market and the subsequent negotiations with it. Knowledge of the market and in particular the solvency and security of reinsurers is vital as the financial viability of the captive rests on the solvency of its reinsurers. Finally, the services of a reputable and established reinsurance broker enhance the position of the insured in its presentation to and subsequent dealings with the market.

A number of points of general significance have to be borne in mind when dealing with the reinsurance market:
  • avoid dependence upon a single reinsurer. This spreads risk in the market;
  • deal with awkward/special/unusual risks on a facultative rather than a treaty basis;
  • ensure the solvency of reinsurers especially for long-tail exposures;
  • recognise the importance placed by the reinsurance market upon loss control and its effect on loss experience;
  • ensure an accurate valuation of EMLs since these form the bases for the excess of loss and stop-loss cover;
  • regularly update covers, limits and sums insured;
  • ensure the punctual remittance of premiums from the parent in order to protect the captive's cash flow.

Professor Gordon CA Dickson M. Litt., Ph.D., FCII, FIRM. 1991. Risk Management. The Chartered Insurance Institute.

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