How to Identify the Best Reinsurance Strategy
At the heart of any reinsurance-buying analysis are good quality gross loss profiles for all classes and subclasses of business written. This kind of information has often been hard to acquire because of the way that claims have traditionally been logged, though it should not be too hard once you have put the correct systems for data storage and retrieval in place.
The next step is to capture, normally through the use of financial models, all the risks inherent in the business. Any reinsurance option can then be tested with regard to its impact on overall company performance and capital. This will measure the outcomes of any number of different reinsurance strategies, taking into account the security ratings and probability of default of potential reinsurers.
They could be quite simple such as just assuming an increase in excess points. Alternatively, the analysis might turn into a wholesale review of reinsurance strategy looking at, for example, combinations of changing aggregate deductibles, excesses, limits, reinstatements and placement percentages with the outputs from each scenario being a number of key statistics.
Armed with this information, management can then arrive at the best reinsurance program, taking into account corporate priorities.
Graph 1
The graph below shows the gross versus net underwriting result for a class of business. It can be seen that when there is a high gross underwriting profit there is a lower net one as the reinsurance program is being paid for with few, if any, reinsurance recoveries. Conversely, if there is a gross underwriting loss the net result is better due to the operation of the reinsurance program.
Graph 2
Additionally, for each reinsurance contract that has been included explicitly in the Dynamic Financial Analysis model, a graph of the reinsurance premium versus the reinsurance recoveries can be examined.
The graph above shows that for nearly 90% of the time there is no reinsurance recovery from the contract. However, when there is a claim it is likely that the recoveries will exceed the premium paid, including reinstatements. It can also been seen that the reinsurance limit of £50m is breached a small percentage of the time and benefit is achieved when reinstating the limit.
Using graphical means such as these the insurer is able to quickly determine if a reinsurance contract is providing benefit.
