Reinsurance Techniques for Capital Optimisation

Insurers must maintain sufficient capital to demonstrate to regulators that they are in good financial condition and can pay claims after disasters. Reinsurance reduces this burden by spreading liability between two parties, making it possible to write more and larger policies without raising premium rates. With low rates driving pressure on margins, many US carriers want to unlock value from their in-force books. Leverage points range from strategic transactional moves to structural and operational levers.


Continual pressure on the balance sheet due to adverse reserve development (incurred but not reported, IBNR) and loss reserving can make it hard for insurers to reach growth and profitability targets. Our reinsurance solutions can help to alleviate these burdens by transferring them from your company to Munich Re, where they can be spread over several years and used for more productive purposes.

Insurance companies take on an immense amount of risk when they provide coverage for homes and businesses against disasters like severe storms. Reinsurance helps to minimize this risk by spreading it out over many different insurance companies so that the entire industry can work together to provide coverage for all those who need it.

With increased uncertainty from low-rate environments, inflation and declining asset values, insurers must be more efficient than ever in deploying their capital. Strategically geared capital financial services can enable insurers to move resources among business units efficiently, reinvest in higher-growth products and sectors or even return money to shareholders if the opportunity cannot be found within the company.


The concept of diversification is familiar to most. The underlying tenet is that diversifying your investments increases your chances of keeping them all. The insurance reinsurance model focuses on diversification by linking specific coverage to loss-adjusted capital needs. It can help mitigate the impact of losses on earnings and debt-to-equity ratios. To take advantage of this opportunity, insurers must build capabilities and processes that dynamically re-allocate cash among their industrial operations. Moreover, they must understand their in-force book at the segment level to deploy strategic levers that address unique block characteristics and create value. It requires a shift from a P&L-focused approach to a more holistic, accounting-centered framework. It will allow for the full benefits of reinsurance to be realized. It will also enable them to move beyond incremental, in-house optimization efforts and achieve meaningful, sustained industrial improvements.


Capital optimization has become increasingly critical as insurance companies continue to struggle with high losses, constrained capacity, and illiquid investment portfolios. Inflation, interest rates, recessionary expectations and geopolitical concerns are driving increased operating costs and depreciation of asset values, which in turn impact reinsurers’ profitability and capital structure. One way to reduce the impact of these factors is by investing in reinsurance. Reinsurance allows insurance companies to restrict the losses they need to pay by transferring some of their risk to another company. It’s useful in natural catastrophes when many people raise claims at once. Purchasing reinsurance can also provide an arbitrage opportunity. Insurers can obtain reinsurance coverage for less than they charge their insureds for the underlying risk by picking the right reinsurers. It can be an effective way to increase profits and meet financial targets. However, it is important to carefully select the right reinsurance partners as some offer different levels of service and expertise.


Insurers need to optimize their in-force books in a low-rate environment with limited new capital. It involves moving money from high-risk products, business lines or countries to lower-risk ones while also reducing overall balance sheet exposure. It can be accomplished through several mechanisms, including divesting the business, selling the book to a reinsurer, or structuring transactions that move the capital upstream. De-risking can occur on a case-by-case basis or in a sectoral way and may include terminating or restricting relationships with MSBs, foreign correspondent banks, non-profit organizations or embassies, among others. Treasury has noted that wholesale de-risking is inconsistent with FATF standards and can frustrate AML/CFT objectives by pushing higher-risk transactions into less regulated, harder-to-monitor channels. A key step in this area is establishing consistent supervisory expectations, including training for federal examiners that considers the effects of de-risking on financial inclusion. It will enable an appropriate balance between controlling risks, economic inclusion, and development goals.

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