A Guide to Re-evaluating Your Reinsurance Program
There are many reasons to take a fresh look at your reinsurance program. It might be because you’re dissatisfied with your current provider, or need to meet due diligence requests from the board - or it might be part of a larger ERM process.
But where do you begin? Recently contributing to a NAMIC conference panel on the subject, I put some suggestions together.
Start by examining the broad reasons behind the current reinsurance structure and its purpose. Check that it fits with your book of business, risk appetite and financials. For example, examine your reinsurance in the context of earnings and surplus protection, premium growth targets and other value-added benefits to do with expert advice.
Going deeper, examine your net and gross results to determine what the short-term and long-term view looks like, whether the program still makes sense. See what margin the reinsurer is making, be sure you understand it and whether it is appropriate. Look for any hidden costs in the reinsurance placement process and determine whether you actually have a relationship with the reinsurer’s underwriters and claims executives.
Now take a look at your current reinsurer panel. You need certainty on long-tail lines of business and ultimate recoveries, so assess the financial stability of your reinsurance panel. Check that the reinsurer (and/or panel) is aligned with your goals and whether the program is actually helping you to achieve growth and reduce loss ratios.
The next stage is obtaining quotes. Here, the presentation is all important. The representative should educate you on why they structured the program the way they did, along with what they rejected and why. Importantly, the statistical data provided should adequately justify the recommended structure and the cost of the program.
A clear analysis of the structure and the structuring process should provide transparency around its economics, projected margins, and help you the buyer quantify the risk being ceded or retained. You should be able to perform a cost/benefit analysis by comparing the economic cost of the various alternatives and contrasting them with changes in the risk being ceded, projected margins, expected losses and premium costs (including the impact of special features).
But don’t be overwhelmed by the numbers: Focus on the analytics that provide clarity to the reinsurance decision and make sure that you completely understand the assumptions being made in the analysis.