Magazine article Risk Management

Risk Managers Tap the Reinsurance Market

Magazine article Risk Management

Risk Managers Tap the Reinsurance Market

Article excerpt

Even with the blurring of the insurance, reinsurance and financial markets over the past two decades, the value of reinsurance has not decreased. The key participants in the insurance industry--brokers, insurers, insureds and reinsurers--are taking on new roles. Brokers and insureds have become investors in or formed mechanisms that assume the risks of third parties. Insurers have established reinsurance operations, while reinsurers have added insurance capabilities. Commercial and investment banks have entered the industry through brokerage, insurance and reinsurance ventures.

While distinct legal and regulatory requirements guide the dealings of each participant, the practical result is that many in the industry perform multiple functions. In fact, a full range of capabilities can be accessed through several departments or subsidiaries within the same institution. Today, while still needing the benefits of reinsurance, a risk manager may be working with a different entity that offers a broader range of products and services.

Reinsurance requires an insurer or a reinsurable entity. Most insurers, particularly in the United States, are regulated entities licensed to insure in one or more states. To become licensed, the entity must fulfill regulatory requirements. Some organizations are granted exemption from these requirements through statutes, such as the federal 1986 Risk Retention Act or state legislation enabling public entities to pool risks. Traditional insureds can thus become nontraditional insurers, or form groups that insure.

Insured or Insurer?

With today's hardening market, more risk managers are choosing risk retention and formal self-insurance mechanisms, such as captives, and are increasingly performing the functions of traditional insurers.

In the last hard market of the 1980s, the capacity and risk knowledge of reinsurers was often accessed by clients and brokers. (Clients demanded greater control of their programs; brokers determined the level of additional capacity that could be committed to build the necessary limits.) Specific risk financing and risk management options were frequently discussed and new alternatives--if not entirely new products--were developed. These new products included captive retention loss ration caps, corridor deductibles and second event covers. Reinsurer capacity was then added to the insurer's capacity based on the commitment of the risk-specific reinsurance contract. In addition, risk managers utilizing captives approached reinsurers for retrocessional support of their reinsurance captives; pools, trusts and risk retention groups similarly sought support.

Today, as in the 1980s, brokers and risk managers are visiting reinsurers in pursuit of additional capacity, alternative financing proposals and additional coverage. Several consultants say they have seen a marked increase in the number of captive and alternative risk financing feasibility studies they are conducting; most in the industry expect a surge in the growth of the alternative market. Reinsurers are essential to the new entities that will be established during this growth trend. Risk managers should actively seek relationships with them.

Accessing the Reinsurer

Especially in today's market, reinsurers may be less likely to establish new relationships. Most reinsurers are inundated with risks to evaluate for renewal and new risks to analyze.

Risk managers may gain access to reinsurers by working through organizations with existing reinsurer relationships, such as insurance companies or reinsurance brokers. This way, the risk manager, the broker and the insurance company underwriter meet with the reinsurance underwriter to explain unique risk characteristics that may otherwise be misunderstood. The risk manager may also seek a special acceptance of exposures or terms that fall outside established reinsurance contract parameters. For example, a municipality with responsibility to maintain a dam may need to explain its condition and the limited downstream exposure before a dam liability contract exclusion is deleted or amended. …

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