Page 23 - Insurance Times JUNE 2022

exposure to the reinsurance market allocation, with the potential to work harder and deliver a higher return
cycle, through improved risk when allocated in a more optimal way.
management and alternative financing
Ultimately it describes the matching of an insurer's buying style with its
arrangements, insurers are reducing
appetite to take risk, the losses it is likely to sustain and the cost of capital
the volatility of their risk financing cost
associated with its various financing options.
base and creating value for their
businesses. An insurer's total cost of risk (TCOR) can be calculated by adding the expected cost
for the risk it chooses to retain to the cost of its reinsurance, while also accounting
Insurance Technical Risk for the cost of capital assumed for unexpected volatility.
Management Optimization (ITRMO)
TCOR = cost of retained losses + cost of capital (including statutory
describes the course of action which
insurers have to follow in order to arrive reserves) + cost of external risk transfer + taxes
at optimal risk financing arrangements,
The cost of purchasing reinsurance might become more expensive in relative terms
typically resulting in a sustainable and
than the cost of capital for retaining the risk. There risk-adjusted return on capital
lower total cost of risk. It draws on
(RAROC) is negative - i.e. no value is being created from purchasing reinsurance.
information and people from all across
the insurer's business, encouraging
The reverse may also be true. An insurer with high retentions may find that over
them to offset investment in mitigation
time a reinsurer's risk-adjusted return on capital (RAROC) is a lower cost - here it
and management strategies with a
would be more optimal to transfer the risk.
reduction in cost of risk, and to
counterbalance expenditure on
Reinsurance coverage can be accurately matched to exposures and loss
reinsurance with realistic retentions.
expectancies. Exposures not reinsurable can be identified and assessed, and
alternative forms of financing arranged to manage potentially major losses. Areas
One of the guiding principles of ITRMO
on which to focus risk improvement or management activity can be identified,
is to treat the use of reinsurance not as
with the investment budget determined by or even offset against the potential
a written off commodity spend, but as a
reduction in losses or savings in risk transfer.
third source of capital, over and above
debt and equity. As well as providing
protection, it can help to optimize the The ITRMO process
cost of capital.
Stage 1 Stage 2 Stage 3
Understanding the
The case for ITRMO
strategy and Design and place
Insurance Technical Risk Management Analyze and
current position of insurance risk
Optimization (ITRMO) describes the model data
the insurer's financing solutions
strategic process undertaken by insurers
business
to make balanced and objective
decisions around the allocation of Stage 1 - Understanding the strategy and current position of the insurer's
capital to risk. Its fundamental principles business
are: The information that an insurer should gather to inform its subsequent decisions
It considers the purchasing of on risk would include:
reinsurance as only one of a Historic claims experience
number of tactics that can be
Existing risk registers
deployed, as part of a broader,
Benchmarked risk data from insurer peer groups
often more long term risk
management and financing Corporate attitudes to risk - insurer as risk-taker or risk-avoider
strategy. ITRMO is about more
Gaps in required underwriting information and develop parameters and
than the limits and deductibles of a
systems for optimum data collection
reinsurance arrangement.
It treats reinsurance and risk Stage 2 - Analyzing and modelling data
financing spend as a form of capital Turning data into meaningful decision making tools forms the second, critical stage
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