Adroit Market Research - Industry Insights

Abstract: A key to success in any competitive marketplace is its flexibility. However, often it is heard that the insurance corporations refer to their reinsurance arrangement as proportional reinsurance or non-proportional reinsurance. While analyzing both these structures i.e. proportional reinsurance and non-proportional reinsurance it was found that both of these have individual benefits as well as shortcomings, thus locking up into any one structure might intimidate the growth & effectiveness of an insurance corporation. For this reason many of the reinsurance organizations syndicate both the structures, approaching at an ideal solution that will probably draw th

Abstract: A key to success in any competitive marketplace is its flexibility. However, often it is heard that the insurance corporations refer to their reinsurance arrangement as proportional reinsurance or non-proportional reinsurance. While analyzing both these structures i.e. proportional reinsurance and non-proportional reinsurance it was found that both of these have individual benefits as well as shortcomings, thus locking up into any one structure might intimidate the growth & effectiveness of an insurance corporation. For this reason many of the reinsurance organizations syndicate both the structures, approaching at an ideal solution that will probably draw the benefits along with evading the probable difficulties of proportional reinsurance and non-proportional reinsurance. The paper defines some of the most common challenges faced by the reinsurance companies for instance, firmness as well as Estimated Maximum Loss breakthrough (EML Bust) and ways of dealing those challenges.

InSure one of the European small- to medium-sized insurance organization ran a common but then money-making business covering motor, small- to medium-sized and personal lines commercial businesses. The company was very much enthused by its underwriting skills plus also made successive underwriting profits over the period of five years. On the other hand, when the 2012 market fall occurred the company had to face a major challenge regarding reinsurance volumes as well as wanted a solution before the renewal of the agreement till the end of the year. At the time of all this happenings InSure had a proportional agreement coupled with a non-proportional agreement defending its net holding.

Major Challenges Faced by the InSure

One of the major challenges faced by the company included the reinsurer supplying the proportional facultative reporter that had come to a calculated decision of leaving InSure’s home-based market plus abandon all the reinsurances. This had left the company deprived of the serious measurements required to write off their biggest risks.

The facultative ability was on the involuntary basis as well as articulated around EUR 6 million xs EUR 3 million yielding share. Also, it aided InSure with more than EUR 10 million of programmed ability. Furthermore, for six threats demanding capacity in surplus of around EUR 10 million that was provided to them on a basis of special acceptance. In addition, all the facultative risks comprising the special acceptances had only one contract diction as well as ease of administration.

This resolution had the advantage of leaving the quota stake agreement unpretentious that was as per the requirements of the InSure. The advantage with an augmented solution for retention states that the underlying distribution remained proportional by nature. Nevertheless, there were certain compressing special effects over the non-proportional agreement that required attention. For which InSure was expected to be extremely transparent while disclosing all the risk factore that might compress the non-proportional agreement. In fact non-proportional agreement did not have much the effect over the pricing of an agreement because of the restricted amount of risks compressing the non-proportional agreement. Lastly, the net retention of InSure that is approximately EUR 500,000 was trodden also driving it to an initial loss position. But, the non-proportional arrangement guaranteed the sufficient premium amount for the net retention as well as this new structure also amplified the premium taken by the InSure.

Another key challenge faced included certain risks that were subject to a probable EML bust exposure in addition of the EUR 3 million xs EUR 3 million that was provided by the non-proportional agreement. For instance, if there is a total risk around EUR 20 million plus an EML of about EUR 10 million, there will be an overall requirement of EUR 10 million EML bust. Approx. 10% of the risk could be yielded to the quota stake agreement and that might react for the proportional share of an EML bust, in such case it would amount around EUR 1 million. The augmented retention stake may be around 90% of the overall risk plus the outstanding EML bust requirement will be around EUR 9 million. The non-proportional treaty will probably cover the EML bust of around EUR 3 million xs EUR 3 million, that would result in a shortfall of around EUR 6 million. The InSure’s reinsures resolution to this including an EML bust section in the facultative agreement. Reinsurers approved the non-proportional agreement reinsurers that the company could cover the exposure if the EML bust condition was approx. EUR 3 million or even less or if the threats were not subject to facultative cover. Moreover, if there was the requirement for EML bust was more than EUR 3 million, the individual layers would be calculated, outspread the facultative layer as well as place the agreement.

Conclusion

The InSure case study illustrates that the non-proportional facultative can be used without disturbing a prevailing proportional treaty arrangement by making certain modifications in the solution. Furthermore, compression can be actually evaded by using an improved retention arrangement as well as revealing potential compressing threats to the agreement reinsurers. Moreover, InSure’s reinsurers could successfully solve a probable reinsurance shortfall on its EML bust agreement. Besides, clarity among all the contributing reinsurers & InSure was essentially to ensure that all the parties stood completely aware of the deviations to the structure of the reinsurance and any possible implications. This enabled them to continue operating with nominal changes to its risk appetite as well as underwriting procedures. InSure did not have to lessen share or withdraw any threats. They had already attained a reinsurance arrangement that augmented their revenue by linking the benefits of a proportional along with the non-proportional reinsurance arrangement. In addition, InSure’s readiness plus capability of not locking themselves to any one reinsurance structure supported them with the flexibility towards adapting to a challenging landscape.