Does Your Reinsurance Program Match Your Risk Appetite? [Infographic]
February 02, 2015| By Abe Kane | P/C General Industry | English
We've recently spoken to a number of captives and Risk Retention Groups that expressed concern with how their reinsurance programs would respond if they were to have adverse loss experience.
It is particularly important to understand if your reinsurance structure contains features that adjust the reinsurance rates and/or commission terms based upon the ceded loss experience. There are a variety of features that reinsurers might employ including contingent commissions, annual aggregate deductibles (AAD), or swing rated (retrospectively rated) plans. These features provide attractive pricing when losses are less than expected; however, the ultimate cost may fall short of expectations, or create additional financial stress when losses exceed the thresholds contained in the contract. In some scenarios, the reinsurance buyer may end up retaining more of the risk than they are comfortable with.
It is important that the reinsurance buyer contemplates both the “expected” as well as the potential for tail event loss scenarios and exposures. “Stress testing” your program helps alleviate uncertainty and can assist in evaluating how your program meets both its short- and long-term goals. It allows you to model how your reinsurance will respond when you really need it and how that response aligns with your organizations risk appetite.
Stress testing can be accomplished in several ways, including:
- "Mapping" out how the program would react to one or several large losses.
- Using a model to perform a Dynamic Reinsurance Analysis evaluating how different reinsurance structures would respond to various loss expectancies.
- Conversations with key stakeholders confirming their comfort levels with the results.
The following infographic can be used as a quick test to help determine how well your current reinsurance program aligns with your risk appetite. In future editions of this blog topic, we'll explore the reinsurance structures mentioned above, including simple ways that you can test how they will react under adverse loss scenarios - when you need them most.