The role of reinsurers in the world of health insurance

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A collaborative approach to reinsurance

Described by the Reinsurance Association of America as “insurance for insurance companies,” reinsurance is the process by which multiple insurance companies share risk by purchasing insurance policies from other insurers.

This is done for four reasons: to limit liability on a specific risk in the event of a catastrophic event; stabilize the loss ratio; to protect itself and the insured against disasters; and increase capacity. By spreading the risk, individual insurance companies are then able to onboard customers whose coverage would be too great a liability to manage on their own.

Reinsurance programs can provide more effective risk protection and help insurers optimize their capital structures to develop long-term strategy and growth performance.

Reinsurers give insurers more stability when unusual or major events occur. They can also provide insurers with solutions such as capital release and monetization of expected cash flows on long-term business. They also provide significant liquidity available to insurers in the event of exceptional claims. Indeed, reinsurance acts as a flexible and cost-effective alternative to a letter of credit.

This allows insurance companies to transfer risks greater than their size and the reinsurer to absorb greater losses. As Aaron Hillebrandt, principal and consulting actuary at Pinnacle Actuary Resources, notes, reinsurance “will limit the impact of large claims or, conversely, consequences on surplus”. It also acts to “smooth finances, transfer risk, and take advantage of savings in writing higher limits.”

Jeff Kenneson, President of Davies Captive Management, characterized the current situation by saying, “As we navigated through the pandemic to the point where businesses were beginning to realize the world was not going to end, this pent-up demand for captives with the hardening market unleashed.

The most common reason insurers use reinsurance is risk aversion. This can stabilize their losses because even though an insurance company can pay a large number of claims made in a short time, paying all of those claims can leave it in a dire and extremely unstable financial position.

The European Insurance and Occupational Pensions Authority (EIOPA) has released the results of the 2021 Insurance Stress Test. The report assesses the resilience of insurance companies to adverse scenarios to see if they can withstand the shock. One of the key findings was that exposure to market shocks was one of the key vulnerabilities.

In recent years, the major event has been the Covid-19 pandemic which has resulted in above-average major claims activity.

Lloyd’s of London reported a market loss of £400 million ($517.8 million) for the first half of 2020. This result was dragged down by £2.4 billion ($3.1 billion) of Covid-19 claims.

According to figures from Munich Re, the Covid-19 represented losses of around 170 million euros in life and health reinsurance in the third quarter.

A safety net for insurers paying large claims

Insurers often need reinsurance when hundreds of claims arrive at the same time. Even if insurers are able to pay a large number of simultaneous claims, this leaves them in a vulnerable financial position, so reinsurers can help keep insurers stable when times are tough economically.

The main disadvantage of insurers buying and entering into long-term agreements with reinsurers is that it is expensive. The pros and cons of buying an expensive insurance policy should be weighed, even if the risk is low or overstated.

However, Kenneson suggests a way forward. “Due to market pressures, a company may feel like it is overpaying for a certain portion of its reinsurance program. So if they are able to fund their own captive to retain risk for certain sections of their reinsurance program, they can potentially reduce costs and fees.

By law, an insurer must have sufficient capital to be able to pay all potential future claims related to its policies. However, the insurer can reduce its liability by transferring part of the liability to a reinsurer. In this way, a benefit frees up capital so that the insurer can support larger insurance claims.

Nevertheless, according to SCOR’s 2020 Activity and Corporate Social Responsibility (CSR) report: A world in turmoil, the Covid-19 phenomenon has been underestimated. And this while the pandemic risk has always been well known to reinsurers. Infectious diseases figure prominently in risk maps and their study is an integral part of the risk management policy.

As the saying goes, hindsight is good, foresight is better; but the second sight is the best of all. Nevertheless, the global scope of the Covid-19 phenomenon has been underestimated. There were also other unforeseen factors such as the decisions taken by governments to contain the spread of the virus, which strongly impacted the insurance sector’s exposure to the crisis.

It was a multi-faceted crisis, with health, economic and financial implications for the travel industry. It affected reinsurers and insurers, both assets and liabilities. Howden summed up the report as a year of change and challenge.

Anne-Marie Cical, Regional Chief Underwriting Officer Europe at SCOR, goes even further in her summary. “Pandemics are considered by the insurance community to be difficult to insure, or even uninsurable. Why? Because the principle of insurance is based on the pooling and diversification (in space and time) of risks. When the economy crashes everywhere, you can’t fix the problem.

She adds on the future measures that will be carried out. “Since the advent of the Covid-19 crisis, we have been working on our guidelines, bringing together our legal, underwriting and risk management teams to clearly exclude pandemic risk with respect to property lines. . We have warned our clients that pandemic risk does not match our risk appetite, as we can only write risks that we can assess, measure and price.

Bruno Latourrette, Chief Knowledge Officer at SCOR Global Life, acknowledges that many people “did not foresee the potential ramifications and interconnections of the pandemic. Reinsurers need to be able to put a price tag on risks, charge to insure against them. We have to estimate how much it will cost before the event happens.”

The recommendations concluded that further research was needed to estimate the frequency of such events and how deadly each would be if they were to recur. There also needed to be an adjustment for factors such as medical advances, increased air travel and non-pharmaceutical interventions such as lockdowns and masks.

Financial respite from market pressure?

Reports suggest that the Omicron variant is less severe than the Delta variant, according to the World Health Organization. This restores confidence in the market.

According to Fitch Ratings, the underwriting performance of global reinsurers is expected to continue its upward trend through 2022. This is the result of surviving near-unprecedented times of catastrophe-related losses, low interest rates and increase in premium rates.

“We’re seeing a lot of new training activity right now,” notes Kenneson. “As we moved through the pandemic to the point where businesses started to realize the world wasn’t going to end, that pent-up demand captive with the market hardening was unleashed.”

Many analysts and experts are optimistic about the future. Howden’s renewal report Changing Times expects to see continued demand for reinsurance. José Manuel González, CEO of Howden Broking, says he “will work closely with insurance and reinsurance companies in this endeavor, and will help clients manage change and obtain the best coverage available on the market”.

About $44 billion is what the coronavirus pandemic has cost reinsurers, according to the Howden report. Although this is a considerable sum, it is much lower than the initial figure of a loss of 100 billion dollars for the market.

The pandemic phenomenon has highlighted the importance of monitoring external risks as well as new and unknown risks – which can have unintended and devastating consequences.

Other elements, such as climatic and environmental changes, also have a considerable impact on risk. These factors could lead to the emergence of new pandemics and new health problems.

Adapt to survive is the message that has come out of these unprecedented times. Insurers must work closely with the reinsurance industry to innovate, advise and provide sufficient capacity during one of the most significant periods of change and chaos in recent history.

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