Managing risk exposure with alternate reinsurance structures

Over the years, the constantly changing dynamics and demands of the modern life insurance market have necessitated a fresh approach to reinsurance structures. These alternative reinsurance structures provide innovative solutions to life insurers looking to efficiently manage their risk exposures while maximising their profitability.

There are a number of alternative structures that are gaining traction among life insurers including quota share reinsurance; surplus relief and capital financing; structured risk transfer; collateralised reinsurance; and embedded value (EV) reinsurance.

In our experience, Southern African insurers tend to opt for quota share reinsurance or surplus relief and capital financing, but it is important to understand that other options are available and, when working with the right reinsurance partner, can be tailored to your needs.

Quota share reinsurance

Traditionally, quota share reinsurance agreements involved ceding a fixed percentage of premium and losses to reinsurers. However, modern variations of this structure allow life insurers to fine-tune their risk transfer. By segmenting their portfolios and ceding different percentages for various risk segments, insurers can optimise capital allocation while maintaining risk control.

Surplus relief and capital financing

In today's low-yield environment, life insurers are grappling with capital constraints. To address this challenge, alternative reinsurance structures such as surplus relief and capital financing agreements have gained popularity. These structures enable insurers to release trapped capital and free up resources for investment in higher-yield assets, enhancing their overall financial performance.

Structured risk transfer

The intricacies of life insurance risk often require tailored solutions. Structured risk transfer arrangements offer insurers the flexibility to create bespoke reinsurance solutions. These structures can be designed to address specific risk elements, such as longevity risk or catastrophic events, providing a more targeted and cost-effective risk transfer strategy.

Collateralised reinsurance

Collateralised reinsurance structures, including insurance-linked securities (ILS), have gained prominence in recent years. These structures allow life insurers to access third-party capital markets to transfer risk, diversify their sources of reinsurance capacity, and potentially reduce costs.

Embedded value (EV) reinsurance

To optimise their capital positions and enhance their return on equity, life insurers are increasingly exploring EV reinsurance. This innovative structure allows insurers to monetise future profits embedded within their existing business, providing a unique avenue for capital management and risk transfer.

Strategic partnerships

Reinsurance is not just about reinsurers being capacity providers, but rather long-term partners to insurers, driven by the need to find mutual solutions to market challenges.

Solid reinsurer partnerships play a vital role in identifying the most appropriate alternative reinsurance structures, and as a result this historic collaboration is evolving beyond the traditional insurer-reinsurer relationship.

For instance, life insurers are forming strategic partnerships with reinsurers to jointly develop and underwrite new products. These partnerships offer insurers access to reinsurers' expertise and capital, fostering innovation and growth in an increasingly competitive market.

Another factor that is changing the game is the advent of big data and advanced analytics. These two tools are revolutionising reinsurance structures, especially where reinsurers have the inherent skills to correctly interpret the data and use the analytical information to inform reinsurance decisions.

Insurers are increasingly leveraging data analytics to create more accurate risk models, and to customise their reinsurance arrangements accordingly. This data-driven approach enhances risk assessment and pricing precision, reinforcing the importance of strategic partnerships with experienced reinsurers.

Look for tailor-made reinsurance solutions

It is clear that as the life insurance industry faces new challenges and opportunities, alternative reinsurance structures are becoming indispensable tools for managing risk, optimising capital and remaining competitive.

To maximise the use of alternative structures, insurers should look for reinsurance brokers with the experience, reach and necessary skills - including analytical expertise - to guide placements.

As a trusted partner in African reinsurance and alternative reinsurance structures, Reinsurance Solutions Intermediary Services offers all this, as well as a dedicated Accident and Health Department that also includes Life.

The alternative structures it provides can be customised, and used in isolation or in combination with other structures, depending on the reinsurance needed.