Maximising the Value of Reinsurance

Reinsurance is a long-established part of the Australian life insurance landscape, with approximately 40% of insurance premiums currently reinsured[1].

Why does reinsurance play such a large role in our market, particularly as insurers will ultimately see reinsurance as a cost to their business? The factors behind an insurer’s reinsurance strategy can normally be assigned to the following:

1. Access to capital and capital efficiency: with access to large global capital pools, reinsurers are traditionally a good source of additional capital to support the growth ambitions of life insurers. Even with most local insurers now having access to international capital through their overseas parents, capital remains an important reason to utilise reinsurance as it offers ease of access and in some cases additional capital efficiency (arguably can provide more efficiently).
2. Insurance risk appetite and volatility management: the life insurer has multiple risks to manage, and different controls available to mitigate. Reinsurance is a well-established control to manage volatility of insurance risk outcomes.
3. Capability: particularly in retail life insurance, where the business is generally longer term in nature, life insurers have traditionally relied on, and leveraged expertise and capability developed by reinsurers to add value to their business. Examples include underwriting capability and manuals, complex claim management, product design collaboration, and customer retention improvement initiatives. As large global players, reinsurers should be able to provide knowledge, experience and insights which can add to the local insurer’s capability base.

The reinsurance strategy of an individual life company depends on the combination of several factors:

• Its growth profile and need for additional capital to fund this growth;
• The ability to access capital elsewhere, such as via an international parent, and the cost of that capital relative to that available from the reinsurer;
• Appetite for volatility in claims experience;
• Its size and maturity in the market, and the extent of its internal core life insurance capabilities (such as underwriting and claims), and other more specific capabilities (eg. analytics, retention);
• Appetite for external review and support, either as value-add, sounding boards or audit controls.
• The lines of business written (group vs retail, disability vs mortality)

The type of reinsurance arrangement sourced will be the result of the above. For example, an insurer with a high appetite for growth and services, who wants to limit their insurance risk or has low access to internal capital, will likely opt for a high quota share reinsurance structure. This is a proportional arrangement, where most of the insurance risk is transferred to the reinsurer and is more likely to be accompanied with stronger and broad oversight of underwriting and claims functions, as well as comprehensive services.

Whilst an insurer with good access to relatively “cheap” capital from an overseas parent, embedded and broad service capabilities, and high appetite for insurance risk, is more likely to opt for a low or nil quota share arrangement, with surplus limits (such as reinsuring all the risk above $1m sum insured on an individual policy). These structures allow the insurer to retain most of the insurance risk but provide capital relief through a reduction in the volatility risk. The reinsurer oversight and support services are more targeted at higher sum insured policies.