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1/6 M97/February 2018 Reinsurance
1
Chapter

In years when financial markets have produced diminishing returns, there has been a return to the more
traditional forms of reinsurance, despite increases in price. This is because in a period of uncertainty,
insurance companies seek the comfort of known products with a guaranteed return; which is to say that
if there is a loss then the insurance company is guaranteed indemnity if it falls under the reinsurance
protection.

A6 Portfolio and asset management

An insurance company’s portfolio is the entire range of risks that it underwrites and can include motor,
Underwriters are
increasingly being household, commercial and professional indemnity among many other classes. Insurance underwriters
judged by their gross are increasingly being judged by their gross underwriting results, aiming at achieving a gross profit
underwriting results
without reinsurance being in place, and using reinsurance to protect the exposure of their account
against any adverse annual fluctuation.
There is also the question of whether a company protects its portfolio overall or elects to consider
individual classes of business. Whereas individual underwriters within an organisation used to purchase
reinsurance for their separate classes of business, purchasing of reinsurance is now becoming more
centralised with the trend towards cross-class portfolio protection.

Consider this…
Consider the advantages for an insurer of purchasing cross-class reinsurance to protect the various facets of its
liability account, which would include, but are not limited to:

• employers’ liability insurance;
• public liability insurance; and
• motor third party liability insurance.

In many insurance companies, the responsibility for the purchase of reinsurance and portfolio and asset
Reinsurance is a
financial tool to management has moved away from the underwriter to account managers so that more emphasis is given
manage the to solvency margins holistically. Reinsurance is a financial tool to manage the insurance risks, so central
insurance risks
control is often exercised at – or close to – board level in order to maximise the group financial strength Reference copy for CII Face to Face Training
and buying power in the most cost-effective way. Where risk can be retained safely within the group,
account managers would see this as a better use of the group resource compared to purchasing
unnecessary reinsurance.

A7 Taxation advantages

Insurance companies are taxed on their technical underwriting results: that is, their final position after
taking into account:
• all the premiums received;
• losses and loss settlement costs;
• administration costs;
• subrogation recoveries;
• reinsurance premiums paid; and
• reinsurance recoveries made (included in this result is any reserve for outstanding losses less any
expected recovery for those outstanding losses from reinsurance).
Therefore, unlike equity returns which are taxable, reinsurance premiums are included within the
Reinsurance
premiums are tax underwriting result and as such are tax deductible. This is a consideration for insurance companies
deductible planning how to resource their company for any exceptional losses that might arise from their portfolio.

A8 Cash flow advantages

Effectively, an insurer has to maintain a balance of readily realisable assets in order to pay its claims
liabilities to policyholders as they become due for settlement and longer-term investments to maximise
growth opportunities. It would, therefore, consider the cost of reinsurance against the potential gains to
be realised from the investments. It would also have to consider the type of reinsurance bought as to
whether, and to what extent, it would have to release its premium as reinsurance premium and when it
could expect to obtain payment from the reinsurer for claims.