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Chapter 6 Reinsurance programmes 6/19

Its duties will usually include:
• Grading all current and proposed reinsurance security. Each reinsured will have its own review and
monitoring processes as well as criteria for evaluating and grading reinsurers. Often, a report is
prepared and a recommendation put to the Committee for a decision.
• Setting the maximum exposure of the reinsured to each approved reinsurer by class of business and in
aggregate.
• Monitoring market news and developments generally for information with potential security
implications, for example, writing unusual business, raising fresh capital, suffering particular claims or
catastrophes, ratings downgrades or corporate activity.
• Verifying that its gradings and recommendations are being followed internally. Within some reinsurers,
the approved security list may be no more than an indication or recommendation to underwriters. In
others, it may be mandatory with disciplinary procedures following if breached.
• Monitoring its aggregate exposure to each reinsurer, that is, all classes of business over all years, and
to all reinsurers within the same group of companies. If the reinsured also reinsures the reinsurer, the
net exposure between the two companies will also be monitored.

C2B Grading reinsurers
When grading reinsurers, the factors to be taken into account by reinsureds are many and varied.
First and foremost is the company’s financial characteristics and a thorough analysis is conducted of the
company’s present and recent past for the purpose of obtaining an indication of its future ability to pay
claims. Key indicators include its solvency margin, available shareholders’ funds, technical reserves and
gross premium, all viewed in the context of its wider business.
Looking at it simplistically, size is paramount on the basis that insolvency is generally restricted to the
Size is paramount
smaller reinsurers rather than the larger reinsurers whose business is more diversified both
geographically and across classes and, therefore, better able to weather significant losses. That said,
AIG would not have survived the losses within its Treasury department without the assistance of the US
Government in the financial crisis of 2008. Chapter
Other factors include the quality of its management and key underwriting personnel, and its capital Reference copy for CII Face to Face Training
structure and the identity of its ultimate owner. A reinsurer may be subsidiary of a large group and it may 6
be appropriate to consider to what extent, if any, that parent would assist a subsidiary in difficulty.
Reinsurance pools may require special consideration. On the one hand, they are usually graded
according to their weakest member. However, on the other, they may have been created for special
purposes (e.g. terrorism risks) and be backed by a government.
On the subject of capital structure, Lloyd’s is particularly attractive to some reinsureds because of its
unique capital structure and this, in particular its Central Fund, is discussed in chapter 9, section B1A.
A reinsurer’s rating by one of the rating agencies is another key piece of information, being the result of Rating agencies are
covered in more
a rigorous, objective and independent analysis by experts. Care must be taken, however, to understand detail in chapter 9,
the criteria underlying the rating and to cross-check those with the reinsured’s own views and situation. section E
Another potential limitation on the utility of ratings is the time lag in issuing reports following
developments.

Regard should also be had to a reinsurer’s domicile as it may, for example, be politically unstable or
subject to minimal regulation or to low accounting standards.
Other more qualitative considerations may include historical speed of claims payment and levels of
related service. The reinsured may also reinsure the reinsurer, or compete in similar markets, and claim
particular knowledge of the soundness and quality of the reinsurer. The reinsured should also have
regard to the reinsurer’s retrocession arrangements, if known. If they are unresponsive, the reinsurer
may fail.

Insurers often modify security criteria for some kinds of reinsurance, especially long-tail lines, where a
Insurers often modify
more cautious approach is demanded as reserves may stay on the books for a considerable time before security criteria for
settlement. Another reason is to maintain continuity of relationships with existing reinsurers. If a some kinds of
reinsurance
reinsurer has served the reinsured well in the past, possibly, in difficult circumstances when coverage
was scarce and expensive, the reinsured may be inclined to accommodate the reinsurer as it may assure
similar treatment in the future, should the need arise.