Major functions of Reinsurance are A) To provide capacity B) Catastrophic Protection C) Stabilize Loss Ratios D) Mechanism to Exit a line of business or Geography E) Share Expertise and F) Financial & Solvency Relief.

Solvency relief reinsurance solution can be with risk transfer or a pure Solvency relief solution with no risk transfer. Pure Solvency Relief solutions are done with very low margin to reinsurers. Normally, cost-benefit analysis is done compared to taking subordinate debt for raising capital. Unless the interest cycle is at the bottom, Pure Solvency Relief Reinsurance Solution always scores over the subordinate debt.

Assume you are a reinsurance broker. A Reinsured approaches you with a Motor portfolio whose loss ratio for 5 years (excluding current year) is between 200% and 250%. However, last year they had taken stringent underwriting steps, and the first 9 months of the current year loss ratio is around 60%.

As a broker you know that no reinsurer will accept this portfolio since past has been very bad and current year is not yet fully developed.

Reinsured tells you that they are confident about their underwriting changes and they can easily bring the loss ratio under control. They are not expecting any risk transfer to Reinsurers. They just want a pure Solvency Relief Reinsurance solution.

I would request the reinsurance professionals to think what would be the appropriate Reinsurance solution.

One aspect to note is that some Insurance regulators are not comfortable and do not approve any Reinsurance solution which does not have adequate Risk Transfer. So, you have to assume that the Reinsured is under an Insurance Regulator who is open to Pure Solvency Relief solutions with nil risk transfer.

Blog by Atmaram Cheruvu