Corporate finance-focused reinsurance programs can address insurers' capital management considerations.

Insurers around the world have become increasingly sophisticated in managing their capital and risks.

Consolidation, evolving solvency regulation and the spread of enterprise risk management are driving a trend of centralized reinsurance buying by insurance companies and large corporations, tailored to enable growth and steer group-wide risk appetite across all types of risks.

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Strategic reinsurance programs are customized to provide more efficient risk protection, and to help insurers optimize their capital structures in order to improve capital returns and minimize capital costs. Increasingly, reinsurance is integrated into insurers’ long-term strategy and growth plans. Challenging circumstances, such as a mergers and acquisitions, changes in regulatory regimes, or market dislocations, require event-specific solutions.

Structured protection and risk transfer solutions are tailored to increase the efficiency of re/insurance programs by combining multiple risks and/or interdependent triggers. As part of an integrated enterprise risk management process, risk transfer is focused on the joint distribution of all risks. Another aspect is the integration of alternative capacity in order to provide large lines of catastrophe capacity.

Corporate finance-focused reinsurance programs address capital management considerations. Cost-of-capital and capital efficiency have become increasingly important in the current and ongoing low-yield, low-growth environment, and reinsurance can substitute balance sheet capital and boost profitability. Such corporate-finance driven solutions include non-life retrospective covers and life in-force monetization with the goal of releasing trapped capital and monetizing future expected cash flows on long-term business.

Reinsurers also engage in long-term partnerships to enable the strategic and growth objectives of the ceding insurer. In the life sector, reinsurance contracts can be geared toward helping an insurer fund high acquisition expenses and negative cash flows associated with growth of new business. In non-life, growth support via reinsurance is more focused on flexible, on-demand capital relief and on enhancing capital efficiency. Cedents can also benefit from a reinsurer’s technical and market expertise.

Insurers can use reinsurance as a capital substitute, and to manage solvency. Reinsurers are able to provide access to their balance sheets at costs below insurers’ capital costs because their portfolios are diversified across a broader range of geographies and risks. Also, reinsurance does not assume all the risks of equity capital (such as asset and operational risk), meaning that the capital costs can be lower than traditional capital. Reinsurance is more flexible than traditional capital and has the added benefit of privacy.

The use of customized structures as tools for achieving longer-term corporate finance and strategic goals is often a multi-year process. Success is guided by close alignment among all parties, which can include insurer, reinsurer, broker and regulator. A number of factors contribute to a successful strategic reinsurance agreement, including clear objectives, senior executive sponsorship within the cedent, experienced deal teams, large risk capacity, long-term relationships, and adherence to best practice in accounting, tax and regulatory compliance. Transparent communication among all stakeholders on objectives, options and future implications is a necessary underlying principle from the outset.