South African insurers are facing the financial impact of increased weather-related catastrophes. Many have had to accept higher reinsurance retentions to manage costs in a hard reinsurance market. (Some reinsurers are now reporting record profits, suggesting the reinsurance cycle may be turning.)
Most insurers have tried to renew existing programmes, negotiating details of retentions, upper limits, reinstatements, and premiums. However, as this balance comes under stress and targeted capital relief faces pressure, insurers should consider varied options for their reinsurance programmes.
We have seen increased interest in stop loss reinsurance – both demand from insurers and appetite from reinsurers.
Stop loss is a form of non-proportional reinsurance, as it doesn’t provide cover for every claim. It’s different from excess of loss (XoL) cover in that it doesn’t apply to a single claim or a single event, but rather to a specified portfolio (or all portfolios of an insurer) over a specified period (often a year).
If the insurer’s claims ratio for the year exceeds a pre-determined threshold, the treaty enables the insurer to recover a portion (sometimes 100%) of claims greater than that threshold (up to a limit). The treaty usually operates after all other treaties on the reinsurance programme.
Given most large catastrophes will be covered by a traditional catastrophe XoL programme, stop loss can be thought of as ‘protection against worse attritional claims’, rather than ‘protection against a single catastrophic event’. However, as deductibles have been increasing, what counts as an attritional claim towards stop loss limits might include painful losses. This could include those that accumulate over weeks of bad weather in a severe winter. Or for a particular insurer, on and off civil unrest, say related to an election.
This form of reinsurance allows an insurer to leverage its reputation for managing underwriting risks and premium rating sustainably. Careful management of attachment points and coverage within the layer helps share risks, providing reinsurers a degree of protection and insurers a significant reduction in SCR.
There is some complexity in the SCR treatment for the ceding insurer and the reinsurer. The standard formula is not precise here and care is required to confirm the results are reasonable.
For your next renewal, think broadly about the structure of your reinsurance programme. Stop loss is just one possibility. Reach out to us for guidance and insights into the capital implications of this key decision, backed by our distinctive independence and objectivity.
#insurance #climatechange #reinsurance
Business Consultant
1wSo happy for you Clementine Chinyuku and Wellington Nyapimbi, ACII. Congratulations and well done guys! Clementine, the sky is not the limit, explore the space beyond our imagination. Keep going, mate.