An important strand of life reinsurance is gaining popularity in Europe, in response to the demands of Solvency II, says Franck Pinette, who is managing director for Willis Re’s life and health division in Emea
The objective of traditional life reinsurance is twofold: to transfer risk (usually under quota share treaties), and to gain the reinsurer’s support in new product development. Solvency ratio impact is incidental.
Under structured life reinsurance contracts, however, the primary aim is to manage the insurer’s capital to impact their solvency ratio.
The boundary between traditional and structured products is not perfectly clear. When insurers reduce the risk they hold through traditional cessions, their solvency position improves. However, the motivation driving structured reinsurance is slightly different. Following the introduction of Solvency II on 1 January 2016, companies began to look for ways to improve their solvency ratio, or to reduce its volatility. Structured reinsurance can achieve this; risk transfer and product support may be secondary considerations.
Life companies have adopted different reinsurance structures to reduce their capital requirements. For example, insurers in Scandinavia, the Netherlands, and Germany have chosen this route to transfer the risk of mass lapse.
The risk is identified as requiring capital allocations under Solvency II, but its transfer to a reinsurer reduces the retained risk, and therefore the level of capital required.
Similarly, some transactions have seen reinsurance used to reduce solvency requirements under annuity contracts. For others, stop loss cover has been purchased to reduce the solvency capital requirement for ‘cat life’. In other examples, companies that are perfectly comfortable with the level of their solvency ratio have chosen to partner with reinsurance providers to stabilise its volatility. Reinsurance can manage away the fluctuations. Under some structures reinsurance buying can be increased automatically when the solvency ratio falls against the insurer’s targets, by functioning as ’contingent capital’.
Whether they seek traditional or structured reinsurance, clients benefit dramatically from the engagement of a reinsurance intermediary to consider the possibilities and options of structured life reinsurance. A broad marketing approach means the cedant significantly increases its options for superior pricing and improved conditions.
This is especially true for those companies wishing to achieve specific capital management goals, but lacking in-house expertise on the possible various reinsurance solutions possible.
Additionally, reinsurers know the market and the buyers well, but on a direct basis are able to offer only their own products and services.
Brokers are able to find and engage the entire global market’s most attractive solutions for each client, and rebalance knowledge levels and relationships between insurers and their reinsurers.
When insurers enter such transactions, it is important that they ensure that the regulator is fully informed of the risk and capital requirement reductions the deals facilitate.
Brokers can assist in this process by helping ceding companies to present the structure of the deal and its rationale.
Finally, executional support from a knowledgeable partner can reduce by several months the time required to complete a transaction, to bring the benefits of capital relief more immediately.