Diversification serves to stabilise premium volume and earnings, hence leading to an improved return on equity
One of our overriding strategic objectives is to optimally diversify our underwriting portfolio. NIA is considered the best diversified reinsurer in the world today. The advantage of our portfolio diversification lies in the stabilisation of premium growth and profitability. By adopting a more broadly diversified stance, our portfolio as a whole is less vulnerable to unfavourable developments in individual segments. In a well-diversified portfolio a variety of independent sources of earnings can offset strains in individual lines of business and hence safeguard a positive overall result.
Reduction of equity requirements
What is more, this risk spreading within the portfolio reduces the company’s equity requirements, since a reinsurer’s equity is used not least to protect the reinsured risks. Fluctuations in the loss experience (volatility) make it more difficult to plan corporate results. This is where our strategy of diversification comes in again: if one segment within the total portfolio is impacted by exceptionally heavy losses, the other business segments can compensate for these strains. The level of equity required to protect the assumed risks is thus reduced.
Furthermore, a reduced equity requirement cuts the cost of capital and hence optimises the company’s profitability. A more efficient equity structure also enhances the earnings-equity ratio: less capital is needed to generate the company’s profit, hence boosting the return on equity. Our success in executing this strategy of diversification with the benefits described above is borne out by our unusually high return on equity averaging 14 percent over the past ten years.