Maximising the Value of Reinsurance

Maximising the Value of Reinsurance

Kirsty Hogan | Partner

At Azuria Partners, we have deep expertise in reinsurance, and an extensive track record working on both sides of the reinsurer/insurer relationship.

This gives us strong insights to help clients maximise the value they are getting from reinsurance – whether it be sourced for reasons of capital efficiency, operational efficiency, or to leverage the value of other services delivered through a reinsurance partnership.

This article provides a short summary on some of the opportunities we believe are available to improve the likelihood of making the most out of reinsurance.

Purpose 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.

Operational efficiency

With such a high proportion of Australian life insurance business being reinsured over many decades, and under many different arrangements, there must be thousands of individual reinsurance treaties in place across the Australian life insurance industry.

From our experience, and due to the nature of change over time, exacerbated by significant M&A activity, there is often little consistency in the structure of these arrangements. There are usually unique requirements in each arrangement, for both the insurer and reinsurer, that are time consuming and manually intensive to continue to administer correctly on an ongoing basis. The long-tailed nature of a life insurance contract means similarly that most reinsurance treaties remain in place for a long period of time. This often comes at a significant ongoing administrative cost that was unlikely to have been factored into the buying decision and importantly presents an increased level of operational risk.

Many of these arrangements no longer provide the benefits, for either party, that existed when the reinsurance treaty was put in place. At most there is a protection for volatility from any large risks remaining on risk, especially if there is a surplus portion to the arrangement. However, there is generally little, if any service provided on these legacy treaties, other than potential support on a complex or disputed claim requiring specialist claims/medical/legal support.

For a significant proportion of existing treaties, we believe there is an argument that the costs and risks of maintaining these treaties is greater than the costs of the risks of the insurer taking back (recapturing) the remaining risks themselves.

A hurdle to simplification is often time and opportunity cost, with insurer resource time being stretched and applied to current work and priorities. This can often be short-sighted, and with careful consideration, fixing legacy treaty inefficiencies could release resources to work on value-adding activities relatively quickly.

A simpler reinsurance portfolio also has the benefit of enabling a clearer and more practical consideration of how to rethink the leverage and optimisation of reinsurance going forward, and more smartly aligned to modern-day insurance risks.

Evolution of reinsurance needs

Most life reinsurance arrangements in Australia are a mixture of quota share (proportional) and surplus structure. These have been established in a time of high growth, and a relatively high value placed on the functional support services a reinsurer has provided, such as pricing, underwriting and claims management.

Do these types of arrangements continue to meet the needs of the modern Australian life insurer given:

  • There has been significant consolidation into a fewer number of larger Australian life offices, most of whom have access to internal international capital and international expertise.
  • There has been a change of ownership, where parents of life companies are now more inclined to have a deeper understanding and more long-term view of life insurance outcomes.
  • Life offices now have strong established core functions, such as underwriting and claims, as well as strong oversight functions and internal controls.
  • Most life offices are now large enough to have dedicated internal investment to innovate and grow.
  • Changes in offshoring reinsurance regulation (LPS117).

Rather than draw the conclusion that reinsurance will be less important going forward, we would postulate rather that it means reinsurance structures and services need to evolve.

Insurers and reinsurers need to work together to devise new arrangements which:

  • Focus on exactly where the insurer is seeking capital efficiencies and can be obtained through a win-win for both parties.
  • Are streamlined and explicit with regards to the services that the life insurer really needs and places value on to meet their business goals.

Of course, this also raises a few practical challenges that need to be considered, such as minimum size and tenure, and appropriate controls to promote sufficient alignment of interest. But surely, with an industry full of incredibly smart professionals, these challenges can all be solved!


Reinsurance is a critical element of the Australian life insurance market. It has provided significant capital support for the industry and delivered value-add services to help life companies grow and prosper over many years. Whilst it will no doubt remain a critical part of the market going forward, some significant shifts in the primary market landscape over the last ten years suggest a review of current reinsurance arrangements and a fresh look at needs going forward would benefit many primary players.

[1] APRA – Life Insurance Performance Statistics (Outward reinsurance premiums / Gross Policy Revenue)

If you are interested in discussing how we might be able to help you improve the efficiency of the use of reinsurance within your portfolio, either as a reinsurer or insurer, please reach out to Kirsty Hogan on 0459 568 962 or [email protected]