Reinsurance 2023

Reinsurance - Alternative Risk Transfer (ART)

"If you always do what you can already do, you will always remain what you were." - From policyholder to manager of your own risk.

Obtaining the individually required insurance cover at acceptable prices is often a challenge for industrial companies. Especially at the moment, insurers and reinsurers are positioning themselves as less and less solution-orientated in terms of the policyholder in traditional risk transfer. As deas, we have excellent access to the primary insurance market and, if necessary, we can also provide capacities and solutions via the reinsurance market and beyond through the team of experts at Ecclesia Re, the Ecclesia Group's reinsurance broker. This represents real added value. Apart from this, however, traditional risk transfer solutions are increasingly reaching their limits. The increasing dependence of the primary insurance market on the reinsurance market, driven by claims trends and capital requirements, means that market cycles and underwriting behaviour are almost identical.

In order to operate successfully in this environment, industrial companies should explore alternative paths, shed the dependency implied by the term "policyholder" and proactively take the management of their own risks into their own hands. In this Market Report, under the heading "Reinsurance", we therefore shine a special spotlight on analysing the ability to bear risks and, derived from this, innovative instruments for risk hedging (known as alternative risk transfer or ART).

Understanding market interdependencies better.

Excursus: Interdependence of the capital, retro, reinsurance and primary insurance markets

It is important to understand the causal chain of effects of the primary insurance market. Contrary to the widespread understanding that the primary insurance market determines or influences the reinsurance market, in practice, especially in a hard market phase such as the current one, the mode of action is exactly the other way round. The rising interest rate environment and the resulting more attractive opportunities for large investors to invest their money in "safe" and fixed-interest investments is leading to an outflow of capital that was previously available to the retro or ILS or "cat bond" market. As a result, the capacities that reinsure the reinsurance market (the so-called "retro market") are becoming scarcer and more expensive. As a consequence, reinsurers are adopting a more restrictive underwriting behaviour, which in turn is reflected in the mandatory reinsurance contracts of primary insurers.

However, these obligatory reinsurance contracts enable primary insurers to offer the underwriting capacities that they can normally offer on the primary insurance market. So what could be placed within a softer market in previous years may not be possible now, or not to the same extent as before. The scarcer and more expensive capacities from the reinsurance market are therefore significantly limiting the current market environment for primary insurers.
 

Traditional risk transfer: lack of efficiency in transformative times

Industrial insurance has undergone significant changes in recent years: rising claims costs (natural disasters and climate crisis, pandemic, sanctions), risk premiums due to the changing risk landscape (deglobalisation as a result of political crises, decarbonisation, etc.) have increased the premium burden for companies. In addition, pragmatic and quick solutions for current customer needs are being made more difficult by further increases in regulatory capital requirements on the insurer side. Traditional insurance solutions are therefore often not sufficient to adequately cover specific risks, especially if a risk balance in the group is only severely limited or completely excluded. When analysing traditional insurance solutions, it can be seen that the insurer often has less than 40 percent of the premium available to finance the risk and the associated potential losses for the genuine risk transfer after deduction of all costs.

These factors are leading to a rethink in the industry towards innovative or alternative risk financing. Among other things, this emphasises the idea of balance sheet protection/company value rather than the traditional risk- and property-based view.

You benefit from the future model of risk transfer.

Strengthening your own resilience and gaining independence from market cycles

The transformation outlined above is a long-term trend that will continue in this year's market cycle. The starting point for our innovative considerations is a holistic analysis of the company's ability to bear its own risks. The aim is to strike a new balance between risk transfer and self-financing by introducing an additional self-carrying level for loss events with medium exposure above the existing retention (for example in the form of a contractual deductible or self-insured retention - SIR). Traditional risk transfer is reduced exclusively to loss events with high exposure.

Individual ownership opens up innovative opportunities.

GRAPHIC

Contemporary alternative risk transfer solutions utilise risk equalisation over time and are therefore generally based on a longer-term commitment by both contracting parties (usually at least three years) instead of adhering to the traditional (business) year view. The elements of financing that are adapted to the degree of ownership make it possible to extend or adjust cover if necessary over this time horizon. A reimbursement mechanism for the financing component in the event of claims-free or positive claims experience provides attractive incentives for continuous improvement in risk management and generally rounds off such concepts.

Conclusion: Making independence a real competitive advantage

The alternative risk transfer can be brought to life in various legal implementation variants, ranging from a simple contract modification to versatile captive models, which in turn go hand in hand with even more far-reaching options with regard to your independence (flexibility in insurance conditions, cost savings, tax/balance sheet advantages, etc.). In order to define the right individual options for you, deas and Ecclesia Re are at your side with their combined expertise.

The consulting approach and service composition based on the analysis of ownership capability is unique for industrial companies in the German-speaking world. Ecclesia Re and Europe's leading provider in the field of captive management have recently combined their strengths in a joint venture to ensure market-leading quality in implementation as well as conceptualisation. In addition to the implementation of captive models in traditional domiciles such as Malta, Luxembourg, Ireland and Switzerland, the foundations have been laid for captive implementation in Germany.

Redefine your risk management with us and secure sustainable competitive advantages through increased independence from the insurance market.

Marcel Nunne