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Understanding the Financial Impacts of Reinsurance Decisions

Key Takeaways from October 22 Live Webinar

Steven Korducki, CPA , the retired Vice Chairman of BMS Re., presented recently on reinsurance decisions, drawing extensively on his immense expertise and experiences from the sector. Below are some key takeaways from this presentation.

Understanding Reinsurance and its Significance
Reinsurance serves crucial purposes such as managing capital, providing underwriting capacity, and stabilizing the operating results of an insurance company.

The Types of Reinsurance Contracts and Their Impact
There are different types of reinsurance contracts, which Korducki exemplifies as either being prospective or retroactive. This information is key, as different types of contracts can impact financial metrics differently.  The concept of risk transfer from the insurance company to the reinsurer, explaining that such transfers bear a certain degree of credit risk. Some key metrics that reinsurance impacts are regulatory ratios, capital positions, profitability ratios, and risk measures such as leverage and liquidity.

Perks and Pitfalls of Reinsurance
Korducki makes a distinction between authorized and unauthorized reinsurers. He informs that insurance firms usually possess treaty and facultative reinsurance contracts. Talking about the advantages of reinsurance, Korducki mentions that it offers capital preservation alongside individual loss severity. However, he also warns that reinsurance can’t guarantee a statutory profit.

Conveying the impacts of reinsurance on balance sheets and income statements, Korducki highlights how different types of reinsurance have varying effects. For instance, excess of loss reinsurance and catastrophe reinsurance can elevate the loss and expense ratios while a quarter share reinsurance can reduce the underwriting components.

Case Study Illustrating Financial Impacts
Using a case study, Korducki elaborates on the requirement of understanding the premium base for assessing the financial fallout of reinsurance transactions, shedding light on the structure and layers of property catastrophe reinsurance.

The Deleveraging Effect of Reinsurance
Korducki particularly emphasizes the deleveraging effect of reinsurance, illustrating the significant reduction of assets and liabilities achieved through a reinsurance program. He identifies quota share reinsurance as the one contract type that can deliver consistent deleveraging of a statutory balance sheet. He makes mention of Legacy reinsurance and its ability to safeguard capital from losses.

Highlights:

  • Reinsurance is a crucial tool for managing capital, providing underwriting capacity, and ensuring operational stability.
  • Different reinsurance contracts can significantly impact key financial metrics. These metrics include regulatory ratios, profitability measures, leverage, and liquidity. This reiterates the fact that reinsurance doesn’t just play a pivotal role in risk management but also in defining the financial position of insurance companies.
  • Reinsurance contracts have a wide-ranging impact on insurance firms’ balance sheets and income statements.
  • A company’s surplus should ideally be 1.5 times its risk-based capital number. Anything less can be an alarming indication.
  • A reinsurance program can effectively de-leverage a firm’s balance sheet.

This presentation provides a comprehensive overview of reinsurance decisions’ influence on an organization’s financial status. A replay of this webinar is available through the Institute CPCU Society Learning Library. To access, create a free Institutes account. The replay is not eligible for CPE Credit.