December 31st, 2015

Developments in Europe: Changes in Reinsurance Decisions

Posted at 1:00 AM ET

Recently, we have seen a change in the way reinsurance is viewed in some companies and groups: The chief financial officer increasingly recognizes reinsurance as an instrument to achieve risk and capital management, rather than using capital measures like equity and sub-debt issuances.

Reinsurance is now also used more often to optimize the diversification benefit, either between different lines of business or between insurance and market risks. For this, some insurance groups have implemented an Internal Reinsurance Vehicle (IRV) to manage the diversification benefit in a more efficient way, and to increase the transferability and fungibility of capital within an insurance group.

Some retrospective reinsurance solutions - loss portfolio transfer (LPT) and adverse development covers (ADC) - have been used for capital management purposes. In the past, LPTs and ADCs have been mainly used for run-off solutions to dispose of loss payment obligations from past accident years in order to, for example, support merger and acquisition activities. Now, retrospective reinsurance solutions are used to free up capital, either to increase the solvency ratio up to a competitive level of risk tolerance described in the risk strategy or to invest the capital in areas with higher return opportunities.

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