How can you manage the volatility of your claims experience with reinsurance?

Reinsurance is a form of risk management. In Africa, new insurance companies may not have the sufficient capital to write the business they want. Nevertheless, through reinsurance they can take the risk and pass it on to a larger player. Reinsurance enables smaller insurance companies to share risk with larger insurance companies. In Africa we have AfricaRe while COMESA has ZEPRE and ECOWAS has WAICARE

Reinsurance forms an integral part of the Insurer's risk strategy, mitigating potential underwriting losses and limiting financial exposure.

Reinsurance is absolutely critical for the primary insurer (the cedent) to offer insurance contracts with unlimited liability or to take on large risks such as shipping or energy.

Like insurance is a contract between an insurance company and the policyholder, reinsurance is a contract between the insurance company and a reinsurer (usually multiple reinsurers if the insurance company is a large one). It is necessary for an insurance company to transfer a portion of their risk to reinsurers to safeguard their solvency in times of large catastrophic event occurrence.

There are many types of classification for reinsurance. (1) One way to categorize is treaty and facultative. Treaty is a periodic contract between the insurer and a bouquet of reinsurers (usually through a broker or a series of brokers) where each reinsurer takes a certain % of all risks for the entire portfolio. Facultative is specific to one-off cases. If a large risk has to be transferred adhoc, total placement is done to a reinsurer. (2) Another way to categorize reinsurance is proportional and non-proportional. Proportional is either treaty or quota share where each reinsurer bears a certain % of risks. Non-proportional (also called excess of loss) is when the reinsurer only pays when the claim exceeds a certain threshold, else not.

Choose Proportional for Shared Risk: Opt for proportional reinsurance if you prefer to share both premiums and losses with the reinsurer in a set ratio. Select Non-Proportional for Specific Protection: Use non-proportional reinsurance to cover losses above a certain limit, protecting against high-severity events. Analyze Loss Expectations: Assess your loss history and expectations to determine the most cost-effective reinsurance type for your needs. Consider Cash Flow Needs: Evaluate how each type of reinsurance affects your cash flow, especially the timing of premium payments and claim recoveries. Match Reinsurance with Risk Profile: Align your choice of reinsurance with your company's risk tolerance and financial strategy.

Assess Your Risks: Understand the specific risks your company faces and decide which ones you need to reinsure against. Define Your Financial Objectives: Identify what you want to achieve financially, such as improving cash flow, protecting against catastrophic losses, or stabilizing earnings. Research Reinsurers: Look for reputable and financially stable reinsurers with a good track record in your industry. Evaluate Costs vs. Benefits: Analyze the cost of reinsurance premiums versus the potential benefits of risk transfer. Seek Expert Advice: Consult with professionals like actuaries and brokers to get insights tailored to your company's situation.

To me I could manage the volatility of claims experience with reinsurance, you can diversify your reinsurance program across multiple reinsurers and layers, tailor coverage to specific risk exposures, negotiate favorable terms and pricing, regularly review and adjust the reinsurance program based on claims trends and market conditions, and employ risk management techniques such as loss forecasting and scenario analysis to anticipate and mitigate potential fluctuations in claims experience. Additionally, maintaining open communication and collaboration with reinsurers can help optimize the effectiveness of the reinsurance program in stabilizing claims volatility.

the main challenge is ensuring that the reinsurance premiums are not excessive relative to your competitiors. If Insurer A has got preferential rates to Insurer B for their reinsurance, then A has a clear competitive advantage. Hence, maintaining underwriting discipline and maintaining excellent communication with your reinsurance broker(s) and reinsurer (s) is critical.

Navigating Operational Complexity: Simplify the management of multiple reinsurance contracts through streamlined processes and integrated software solutions. Mitigating Credit Risk: Conduct thorough due diligence and continuous monitoring of reinsurers to minimize counterparty risk. Maintaining Control and Flexibility: Structure reinsurance agreements to preserve decision-making autonomy and adaptability in coverage. Aligning Interests: Establish clear, mutually beneficial terms in reinsurance contracts to ensure alignment of objectives and incentives. Resolving Conflicts Efficiently: Implement a structured, transparent process for dispute resolution to address potential conflicts of interest promptly.

The main measurement is the return on capital / gross vs net loss ratio (of reinsurance). It is the clear understanding of the trade-off from the Reinsurance premium vs. the reduction in capital costs.

Track Loss Ratio Improvement: Measure how reinsurance affects the loss ratio before and after its implementation. Analyze Combined Ratio Changes: Evaluate the combined ratio to see if reinsurance helps lower it, indicating improved profitability. Monitor Return on Equity (ROE): Check if reinsurance enhances ROE by reducing volatility and freeing up capital. Evaluate Risk Exposure Reduction: Quantify how reinsurance decreases net risk exposure to catastrophic losses. Compare Actual vs. Expected Results: Regularly contrast actual outcomes with projections to identify performance gaps.

Consider measuring performance indicators such as ROE & customer satisfaction metrics. ROE reflects the profitability of your capital, indicating how well the reinsurance strategy is contributing to financial success. Customer satisfaction metrics, like retention rates & feedback scores, reveal the impact of reinsurance on customer experience & loyalty. Analyse the efficiency of the reinsurance program in optimizing capital usage, reducing volatility, & enhancing risk management. Ensure alignment with evolving risk profiles, market dynamics, & strategy. Utilise data analytics & Gen AI tools to conduct advanced scenario analysis, predictive modeling, & risk simulations, to make data-driven decisions and fine-tune your reinsurance strategy

Diversifying Reinsurance Partners Adjusting Retention Levels Implementing Aggregate Stop Loss Coverage Utilizing Multi-Year Reinsurance Contracts Exploring Alternative Risk Transfer (ART) Solutions Regularly Reviewing and Adjusting Coverage Integrating Reinsurance into Enterprise Risk Management (ERM) Leveraging Data Analytics for Risk Prediction Considering Catastrophe Bonds and Securitization Engaging in Proactive Claims Management