November 14th, 2009

Reinsurance Brokers: Orderly Markets and Optimized Results, Story Index

Posted at 12:30 AM ET

Part I, Introduction: Insurers use reinsurance to lay off risk, free up capital and manage earnings, with the ultimate goal of maximizing the value of every dollar applied to risk. The flexibility afforded by the reinsurance transaction allows insurers to write more policies, enter or withdraw from markets — ultimately feeding growth in revenue, earnings and market capitalization. While it is possible for insurers to deal directly with reinsurers, many choose to use a reinsurance broker. This intermediary provides services that an insurer may not have in-house. Representing the interests of the insurer, the reinsurance broker facilitates access to capital, provides catastrophe modeling services and plays a deep advisory role on areas ranging from risk and capital management to identifying and pursuing opportunities for growth.

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Part II, Executing the Transaction: The primary role of the reinsurance broker is to help insurers move risk out of their portfolios, most often — unsurprisingly — via the purchase of reinsurance. Cedents have three basic objectives for the use of reinsurance: reduce risk held, optimize the productivity of capital and manage earnings. The first is clear — reinsurance entails the act of transferring risk to another party. In doing this, the cedent gains flexibility in deploying the capital it has on hand, which produces revenue, market share and market capitalization growth opportunities. Insurers also use reinsurance to remove some volatility from their earnings. Consequently, reinsurance is much more than a tactical risk management tool; rather, it is of strategic value to every cedent in the marketplace.

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Part III, Benefits to Capital Suppliers: Intuitively, the reinsurance broker’s role as client advisor would appear unfavorable to reinsurers. After all, the broker seeks — in part — to secure advantageous pricing for its client. The measures taken to lower the insurer’s cost to transfer risk, however, usually enables reinsurers to manage their own portfolios more effectively. From the introduction of the business opportunity through post-transaction capital management, the reinsurer can use the broker’s involvement to bolster its operation.

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Part IV, Value Beyond the Transaction: The reinsurance broker does more than facilitate transactions that transfer risk, though this has long been viewed as the category’s core strength. With the importance of risk modeling, counterparty credit evaluation and other advisory services, the act of transferring risk necessarily involves more than sourcing capital and executing a transaction. The role of the intermediary continues to grow, as primary insurers change their perspective on reinsurance. Fresh memories of the financial crisis remain, and many cedents are taking broader views of their portfolios and seeking ways to optimize their capital and bolster their market capitalizations.

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Part V, Conclusion: The term “broker” implies a transactional focus, but in the (re)insurance business, a wide range of activities is necessary, far beyond merely bringing buyers and sellers together. To complete a transaction in a manner that gives both insurers and reinsurers the ability to make their capital as productive as possible, the intermediary analyzes data, runs catastrophe and model scenarios to immobilize the element of surprise. Each task contributes to the ultimate determination of capital sources and completion of risk transfer.

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