We provide tailor-made solutions for comprehensive earnings and balance sheet protection.
Structured reinsurance constitutes one of NIA’s strategic fields of action. The purpose of structured reinsurance is to stabilise our clients’ earnings and protect their balance sheets. This aspect is increasingly gaining in importance since companies, and especially those listed on the stock exchange, are coming under steadily growing pressure to show stable results in both the short and long term. Given the differing needs of our clients, structured reinsurance solutions are usually geared to each individual situation and are therefore not a commodity product.
Limit of risk transfer
We develop solutions which enable our clients to self-finance their risks, thereby allowing them to keep such risks on their own books – along with the associated profits and losses. At the same time, such products provide protection for key ratios in the income statement and balance sheet, respectively (e.g. dividends). Thus, our products ensure that incurred losses will not have a negative impact on the client’s key financial variables – even though the client carries them himself. In contrast to the full risk transfer associated with traditional reinsurance, a limited risk transfer thus lies at the heart of structured coverage. One means of self-financing and limited risk transfer is the multi-year contract, for example, which ultimately enables insurers to finance their own risks over a period of time.
Example: Spread loss contract
This can be illustrated by the following example: Primary insurer and reinsurer conclude a so-called spread loss contract, i.e. a contract which covers the risks of a defined portfolio over a multi-year period. The period is fixed at five years, the reinsurance cover amounts to 50 EUR million per loss event – with the proviso that losses passed on to the reinsurer may not exceed 75 million EUR over the entire period of the contract. The insurer pays an annual reinsurance premium of 10 million EUR. During the period of the contract, losses carried by the reinsurer may at no time exceed the cumulative reinsurance premiums already paid to the reinsurer at the date of loss. If, at maturity of the contract, the losses carried by the reinsurer are less than 90% of the cumulative reinsurance premiums collected, the insurer receives a profit commission.
Reduced volatility
This example illustrates just one possible type of contract. Nevertheless, it clearly demonstrates some of the aforementioned basic principles, such as the limitation of the risk transfer and a possible multi-year contract duration. Both the insurer and the reinsurer will benefit from such contractual arrangements. For the insurer, the initial appeal is that he can base his calculations on constant and predictable reinsurance premiums. Furthermore, this type of reinsurance is more affordable for him than traditional coverage. Yet at the same time the insurance company is able to protect itself against the negative effects of a major loss event in individual financial years and it will receive a profit commission if the business it writes is profitable. For the reinsurer, such arrangements primarily provide a stable, predictable volume of business over a multi-year period. More importantly, however, this type of solution offers risk limitation and hence reduced loss volatility. Consequently, the amount of equity required to cover the underwriting risk is lower under this type of contract.
Above-average return on equity
The reduced equity requirements as opposed to those of traditional reinsurance solutions are a particularly attractive feature, which generates the above-average returns on equity associated with this segment.
