Blogs - Insurance Services Outsourcing
| Outsourcing can help insurance companies map tertiary insolvency |
| By Jeremy Owenson on 3/4/2010 11:23:14 AM |
Reinsurance protects insurance companies against potentially catastrophic losses, but what happens if the reinsurers themselves are not there to pay the claim?
While the downstream reinsurance companies are in the market and viable, all is well.However, the economic downturn has put pressure on reinsurers, and the principal insurers must ensure that the cover is still there.
While it is a relatively rare for reinsurers to go into administration, the risks of that happening in these economic times has increased. Moreover, there has been an increase in Solvent Schemes of Arrangement in which insurance companies are exiting from their contracts. This can leave the principal insurer exposed to a risk that it did not expect.
Insurance companies need to consider the chain effect. They may find they are exposed downstream to an organisation of which they had no prior knowledge. For example, in 2008, the UK high street retailer Woolworth’s went into administration. The unexpected consequence was the collapse of the music chain Zavvi, its main supplier. Woolworth’s administration meant that Zavvi went bust. Similarly, in insurance, the collapse of a smaller reinsurer can have a knock-on effect through a chain of insurers. This becomes particularly critical where the risk underwritten is a long term risk such as employers’ liability.
For example, In the UK, insurers of heavy industrial employers in the 60s and 70s found they were heavily exposed to disease claims such as deafness, vibration white finger and mesothelioma. Occurences of disease as a result of exposure to asbestos dust were latent for decades. This risk was not considered when the policies were sold, and the liability has caused employers and insurers to go into administration. Insurers are now picking up more than their fair share of claims and claims handling fees.
Further, reinsurers are actively looking to limit their liability by either acquiring reinsurance to close their books, looking to close down unwanted historic contracts, or even moving to Solvent Schemes of Arrangement.
That’s why insurers must review their reinsurance arrangements retrospectively. They need to consider not only the solvency of the reinsurers to whom they have ceded the risk, but also do due diligence on any subsequent (or tertiary) reinsurers to ensure they will not be the victim of any chain reaction.
As insurers realign their businesses, they must determine the exact extent of their tertiary reinsurance arrangements. All this data lies within the company or their primary reinsurers, and now it time for them to be aware of how solvent the reinsurers are. If a tertiary insurer has gone bust, insurers must know that the liabilities will come back to them.
There are two ways to tackle this:
- Devise an active strategy to review the reinsurers and tertiary reinsurers’ syndicates and ascertain the levels of risk that has been ceded, the solvency of those organisations, and their propensity for considering Solvent Schemes of Arrangement.
- Enter into an arrangement with tertiary insurers and unpick historical contracts. It may be better to take some money now than risk an uncertain future.
This can be done in cost-effective manner by deploying research and analytics to map out the exact extent of this exposure. Analytics can help the insurer trace a chain of such treaties and by knowing the exact extent of this, it is possible to pre-empt a domino effect and the attendant risks.
Ideally, this should be the responsibility of the finance and accounting function (F&A). But as we know, F&A has its hands full with credit control functions. It is therefore worthwhile considering whether outsourcing re-insurance analytics can enable companies to a grip on an issue that does not seem apparent until a crisis strikes. |
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