The necessity for reinsurance and the role of a reinsurance broker

By: Nina Joubert, RFIB Africa

“There has been a lot of focus on reinsurance as a topic and a strong focus towards education in reinsurance. This is really fantastic for the industry and reinsurance buyers. It allows people to see the value that brokers can buy and create; it shows that reinsurance brokers add value instead of being simply transactional.”

Lee Ellis, CEO – RFIB Africa, said after presenting at a recent education event in Johannesburg, where all the attention was on the importance of reinsurance.

There is much to contemplate when evaluating the necessity for and importance of reinsurance. Whilst these complex considerations cannot be summarised in a short article, we are able to articulate the basic reasons why insurers purchase reinsurance.

It’s common knowledge that, at the core, reinsurance ultimately protects the insurer’s balance sheet, but other main drivers could include; a substitute for capital, catastrophe protection, large loss mitigation, reducing volatility and to create stability across earnings for stakeholders. Reinsurance could also assist the buyer with meeting regulatory requirements, and an increase in capacity requirements.

Lee noted that: “Reinsurance plays a critical role in the financial operations of an insurer. It’s a business necessity. RFIB Africa delivers an innovative and bespoke approach, delivering solutions solely aligned to the best interest of our clients.”

SO, why engage a Reinsurance broker? We always act in the best interest of our client, providing expert independent advice. It is always best to select your reinsurance broker based on a multi-faceted approach to ensure that business risk and exposure is lessened as far as possible.

A few simple reasons could be noted as follows;

  • Brokers will provide clients with access to global markets and global market intelligence,
  • to provide access to financial and catastrophe modelling toolkits,
  • facilitate benchmarking and credit risk assessments, as well as the standard expected service delivery around contracts and wordings,
  • knowledge of regulatory frameworks,
  • enabling informed purchasing decisions, and ultimately
  • ensuring alignment of reinsurance coverage as well as post placement functionalities such as effective claims handling.

By having a thorough understanding of clients and their objectives a reinsurance broker can reach the desired outcomes of an arrangement. Any reinsurance programme should identify these unique client requirements and be aligned accordingly with underwriters, reinsurers and in the policy wording.

In the end insurers want to utilise reinsurance where it is cheaper than cost of capital. A programme structure should enable prudent underwriting to prescribed underwriting limits, it should reduce the potential for earnings volatility from severity (per risk and CAT) and frequency (attrition) losses and be in line with the FCSA prescribed formula. Your reinsurance broker will also ensure that pricing is achieved within the tolerance of benchmarking and has the best possible weighted average of security.

There’s no doubt about the importance of reinsurance Equally, there should be no debate around the value of a reinsurance broker.

Here are Five Fun Facts about Reinsurance you may not have known:

  • One of the first reinsurance companies, Cologne Re, was set up in 1846 in response to the devastating Hamburg fire of 1842, which destroyed a third of the city and killed 100 people. The blaze exposed the inadequacy of insurers to cope with such a catastrophe and prompted calls for the creation of firms that effectively insure insurers.
  • The World Trade Centre attacks in 2001 cost the insurance industry nearly $28 billion. $17.6 billion was paid by reinsurance (that’s about 64% of all insured loss!)
  • Reinsurance paid 60% of all insured losses from Hurricane Katrina in 2015, approx. $22.6 billion.
  • The world’s two largest reinsurers are Swiss Re which was set up in 1863, and Munich Re, which was created in 1880.

RFIB Africa is one of 6 global hubs offering bespoke reinsurance solutions. RFIB was established in 1980 in the heart of London and is an established Lloyd’s broker, providing insurance and reinsurance intermediation together with risk management advisory and related services.