OPTIMIZING REINSURANCE PROGRAM

Insurance operates in risk pooling mechanism, but to maintain optimal level of risk they have assumed insurance company impose several risk management techniques to ensure they protect their financial stability and balance sheet.

For the Insurance Company a risk management decision play vital strategic role in ensuring it maintain its solvency margin, improve their earnings and overall economic value of the company for both internal and external stakeholder.

And one of the best risk management technique used by insurance company is reinsurance. However, insurance company may choose to implement other risk management decision such as decline the risk, limit its acceptance to certain level it capable to handle or it may share the risk with other insurance company through co-insurance.

However, many insurers when do cost-benefit analysis of their reinsurance programs conclude that reinsurance purchase is a losing proposition since they subtracting all premium ceded to reinsurer from all recoveries and commission received and results most of the time become negative.

But, they forget that reinsurance enable insurance company to share risk with other insurance company, hence reduce the level of risk assumed, improve solvency margin of the company, control volatility of the financial results, increase company efficient in the use of available capital, increase company underwriting capacity and enable insurance to use reinsurer’s expertise in developing new products or entering new market.

Therefore, optimal use of reinsurance may improve shareholder value by provide soft underwriting capital that substitute shareholder’s equity which in return reduce cost of capital and increase underwriting returns.

But, like any other risk management decision, purchase of reinsurance program requires critical analysis of heterogeneous insurance portfolio of different policies to reflect its variation in sum insured, premium, claims experience and other management cost involved.

Therefore, to ensure proper use of and adequate management of sound reinsurance program so as to gain the benefits of reinsurance purchase, insurance company must establish robust control system that establish a clear reinsurance policy that specify reinsurance needs of the company, retention level, adequacy, scale and nature of reinsurance purchased to maximize the efficiency of capital use that reflect economic and operational environment that support reinsurance decisions.

Also, insurance company must incorporate reinsurance in enterprise risk management of the company that specify the role and responsibilities of Board of Director and Senior Management oversight in the development of reinsurance strategy.

The Board of Director and Senior Management should be responsible for establishing appropriate monitoring mechanism to ensure reinsurance strategy is being delivered and complied, and ensure regular reviews of the performance of reinsurance programs to ensure it meet their strategic objectives and function as intended.

Furthermore, Board of director and Senior Management should put in place an appropriate written term of reference for the department in charge of day to day management of reinsurance program, this written term should specify their scope of authority in managing reinsurance program and any matter requires board or management attention.

Since purchase of reinsurance program expose insurance company to other type of risk such as counterparty risk, legal risk and liquidity risk. Hence, is the duty of insurance company to ensure that they take all necessary measure in choosing reinsurance partner(s), the below factor can be considered when selecting reinsurance company.

Therefore, to optimize reinsurance program there must be clear reinsurance strategy in insurance company that reflecting overall company’s capital and capital structure, risk portfolio and risk appetite of the company, reinsurance market condition and cost. The Strategy should coordinate reinsurance department, underwriting department, claims department and finance department for all reinsurance related activities, the reinsurance strategy should have a clear tone from the top to bring the expected returns.