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9/32 M97/February 2018 Reinsurance

Key points

The main ideas covered by this chapter can be summarised as follows:
Nature of the reinsurance market
• Reinsurance is bought and sold in both local and international markets.
• Ceding insurers prefer a spread of reinsurers offering security and stability.
• An ‘ideal’ international reinsurance market offers, among other things:
– political stability;
– good geographical access;
– quality transport and communication systems;
– a pool of specialised staff and competitively priced office accommodation;
– a stable legal and regulatory environment;
– developed financial infrastructure and a strong national industrial base;
– a strong currency; and
– good arbitration facilities.
• Extraneous environmental factors affecting reinsurance transactions are price, availability, the strength of
competitors, developments in loss exposures, claims potential, alternative products, strength of financial markets,
and extent of coverage being provided by ceding insurers.

Global reinsurance markets
• The London Market comprises of Lloyd’s and the IUA.
• Solvency II introduces a new harmonised EU-wide (re)insurance regulatory regime and is having a significant
impact on how companies use capital.
• New business is acquired through direct marketing although brokers are also used as an introductory source
because of the positive impact on acquisition costs.
• The US domestic insurance industry is the largest in the world and this is reflected in the size of the US reinsurance
market.
• Reinsurance regulation in the USA is the responsibility of individual US states although the NAIC encourages Reference copy for CII Face to Face Training
consistent national regulation. The Sarbanes-Oxley Act 2002 is legislation affecting the corporate governance of US
reinsurers and affects foreign companies operating in the US market in the same way.
• The Bermudian market has developed from a low-tax haven for captive insurance companies into the world’s
largest property catastrophe reinsurance market since its inception in 1993.
• The Asian markets comprise Japan (where the domestic market is dominated by a few Japanese companies),
China (where national companies had a monopoly until 2003 when certain foreign reinsurers were allowed to set
up branch operations) and India (where there is a national insurer conducting business).
• Other significant world markets include Australia and Brazil.

Captive insurance companies
• A captive insurance company is a special purpose vehicle created to manage and to finance risks emanating from
its non-insurance parent company.
• Captives are particularly useful if the firm has predictable losses or if cover is unavailable or too expensive in the
wider insurance market.
• Common captive structures include single parent captive, a group or association captive and PCCs.
• Captives tend to be domiciled in territories offering favourable tax and other fiscal advantages.
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Chapter