Buyers need to consider company-wide implications of risk transfer

Insurance companies’ C-suite executives – chief executives, chief financial officers and chief risk officers – are playing a larger role in the reinsurance buying decisions given the greater focus on managing risks and returns on a company-wide basis, according to Alkis Tsimaratos, executive director at reinsurance broker Willis Re.

Reinsurance buying decisions now involve a wider range of constituents from the company. “Buyers have to take into account more global indicators which are sometimes outside the scope of reinsurance,” Tsimaratos told Global Reinsurance at the Baden-Baden meeting this week. This can include considerations such as how much capital the company as a whole has, its risk appetite and its profit targets. “The reinsurance buyer has to learn to translate macro and capital considerations into micro reinsurance buying decisions,” he said.

As a result brokers such as Willis Re are increasingly having discussions that directly involve C-suite executives. However, Tsimaratos insisted this does not mean cutting the traditional reinsurance buyer out of the loop.

“We always implement the strategy with the reinsurance buyers but we are helping the buyers provide the C-suite with the appropriate set of concepts and data to be able to link what is happening in the reinsurance market with the earnings and capital of the overall company,” he said “We are trying to give the reinsurance buyers the right tools to communicate with the C-suite and we communicate with the C-suite when appropriate.”

He added: “Reinsurance buyers will more and more need to have capital and performance indicators for why they transfer risks at the micro-level. For example, why buy a motor treaty when you have a cat treaty which is 10 times as big?”??

Insurers’ desire to manage risk transfer company-wide is being driven in part by the risk-based approach of the European Commission’s pending Solvency II capital regime, currently expected to come into force in January 2013.

While companies have modelled their natural catastrophe exposures for a number of years, Solvency II’s risk-based approach is encouraging forms to spread the use of models to other risk areas. Tsimaratos contended that as a result, Solvency II’s influence is already changing reinsurance buying practices.

“We are seeing more aggregate covers being purchased as part of new risk based performance strategies,” he said. “This is not because of the soft market, which it would have been historically, but because companies are now capable of modelling their exposures."