The term ‘Structured Reinsurance Solutions’ (SRS) refers to a bespoke approach to reinsurance involving an explicit combination of risk financing and risk transfer techniques. They involve a blend of reinsurance concepts with a profit and loss potential that is reasonably predictable to both sides and diversify risk across the additional dimension of time.
Whilst this approach does not really differ from traditional reinsurance in the long term ‘spirit’ of the relationship, the contractual terms clearly manifest the intent of the parties at the inception of the deal itself.
While SRS techniques have been widely used for several decades in developed insurance markets such as North America, Europe and Japan by most of the major reinsurers, they are now gaining considerable acceptance within the developing markets of Asia.
The major reinsurers refer to such solutions with a variety of adjectives in addition to structured, including customised, advanced and strategic, but they all include a number of similar ingredients.
The Sigma report2 identifies seven drivers for continued growth in the SRS segment:
- Insurers are becoming much more sophisticated in their reinsurance purchasing.
- Strategic reinsurance solutions can optimise risk transfer, enhance capital efficiency and support strategy.
- Customised reinsurance solutions can be more efficient, targeted and flexible than traditional capacity.
- Strategic reinsurance programs increasingly address capital management considerations.
- Reinsurance solutions can focus on enabling strategy and growth.
- Reinsurance can serve as an efficient, targeted and flexible capital substitute.
- The best strategies for success are based on long-term alignment between all stakeholders.
The very nature of these contracts permit both parties (cedant and reinsurer) full flexibility in defining and agreeing the terms of the contract, thereby not being limited in any way to the restrictions of traditional reinsurance where standard wordings, deductible levels and exclusions are inevitably used.
SRS are often used to manage the volatility in ‘baskets’ of risks, ideally those with limited or zero correlation. Such multi-line solutions can also incorporate risks where traditional market solutions are inefficient or unavailable for a variety of reasons.
This powerful combination of long term commitment and broad risk coverage make SRS suitable for contingent capital, surplus relief and captive risk management (or as ‘quasi-captives’), of which more later.
The growth and interest in these structured solutions is mainly due to the value created by enforcing a strong relationship between the two parties under contract. In SRS, carrying of risks and the sharing of losses (usually with high profit commissions in cases of low losses) aligns interest between both parties.
Another common characteristic of SRS is cashflow efficiency. Premium reserves and/or funds withheld mechanisms are often used to avoid unnecessary remittances between the parties together with the associated foreign exchange costs.
Similarly, within excess of loss contracts, deposit premiums are set at much more manageable levels than traditional covers. This recognises the ultimate repayment of some of these funds in the form of either claims or profit commissions.
SRS often work best where there is a strong component of risk financing to a programme, especially when assessed over a multi-year contract term. This can be the result of historical loss experience or just a high exposure to loss frequency that results in significant premium volume relative to the limit of liability. Often such covers are referred to as ‘working’ or ‘burning cost’ layers.