tains rich policy information, offering it
a clear view of a client’s mortality experience, and how that will likely evolve in
the future. With this information,
Transamerica Reinsurance creates models to understand how a business is
expected to perform under a variety of
different scenarios—be it increasing
mortality, decreasing mortality, changing the pattern of lapses or looking at
different economic scenarios concerning interest rates and defaults. This
enables the reinsurer to assess the potential upsides and downsides of working
with a particular carrier, and how it
affects the risk profile of the reinsurer’s
entire book of business.
“The benefit that we have found over
time is just the speed and amount of
information that we are able to put
through actuarial modeling software,”
says Brock Robbins, SVP of life solutions
for Transamerica Reinsurance. “It certainly has increased significantly as computer
processing has improved, and being able
to take advantage of distributed processing, grids and all those sorts of things.
[The software] just enables us to run
many more scenarios than we were able
to do even three or four years ago, and
that helps us really fill out the shape of the
Reinsurers are focusing on risk management in part to improve the bottom
line, reduce loss and forge strong, long-standing relationships with carriers. (See
the “Assuming Risk Responsibly,” right,
for more). However, their efforts are also
largely being shaped by increasingly
rigid solvency requirements and
“We really need to be cognizant of
not only how a particular contract is
going to perform from a purely economic perspective, but also how it will
look through the lens of the various
accounting regimes that each of the
contracts touches,” explains Robbins.
ASSUMING RISK RESPONSIBLY
In becoming more finicky about the
carriers with which they work, and in
attempting to better assess and manage
the range of risks they confront, reinsurers are increasingly discarding simple
spreadsheets for more sophisticated
technology. For instance, in life reinsurance, actuarial modeling software has
advanced leaps and bounds in recent
Transamerica Reinsurance, which
deals with tens of millions of underlining policies, has been using actuarial
modeling software for years, and continues benefiting from its evolution. The
company, which is a division of Cedar
Rapids, Iowa-based Transamerica Life
Insurance Co., has a database that con-
When speaking of risk, there is a natural conflict between the various stakeholders in insurance and reinsurance. While a firm’s investors or shareholders
(in a joint stock company) seek the greatest possible return on their capital
outlay, the policyholder has purchased a promise from the insurer or the reinsurer that they will pay him when (and if) the indemnified event or loss occurs
and wants as much capital as possible as a cushion.
“The more capital the insurer or reinsurer has, the harder it is to get a high
return on it,” notes Chris Klein, global head of business intelligence and a managing director of New York-based Guy Carpenter. “You have to make the capital sweat even more. So there is that permanent tension between the principle stakeholders in the transaction.”
Insurers and reinsurers are in the business of assuming risk by transferring,
spreading and redistributing risk. “That is how they make their money,” Klein
says. “They have some capital and they want to expose it to liabilities. The key
for them—and it is the same for insurers—is to ensure that they are going to
get a satisfactory reward for exposing that capital to risk.”
And how does a reinsurer ensure that its insurance client does not end up
savaging its books? The main risk variables that Transamerica Reinsurance looks
at when considering to work with an insurer, according to Brock Robbins, a SVP
of life solutions for Transamerica Reinsurance, include the following:
•The risk profile of the carrier. This includes the company’s financial ratings, balance sheet, and capital position. A life reinsurer aims to establish long-standing relationships with carriers and so wants to ensure that the organization it works with is financially stable.
•The underlying mortality and lapse experience of the carrier, and the
nature of the carrier’s distribution. A reinsurer may assess the carrier’s target
market and the viability of its distribution over the long term. For instance, is
the carrier going to be able to continue writing in its space, and is it looking at
writing in new spaces? By assessing a carrier’s underwriting capabilities, a reinsurer can know what to expect from its relationship with the carrier, and how
to effectively establish prices in light of the risk it is assuming.
•How well the carrier aligns with the reinsurer. If the reinsurer effectively aligns itself with the carrier, it stands to reason then if the carrier is successful, the reinsurer also is successful. The reinsurer needs to incent the carrier to
retain sufficient risk so that the latter can illustrate that it is being a responsible steward in the process.
This could include conforming to U.S.
statutory accounting principles, U.S.
generally accepted accounting principles (GAAP) and International Financial
Reporting Standards (IFRS).
Additionally, rating agencies that are
“getting beat up these days” are now
asking for reinsurers to have a better
tool set and better policies, notes
Donald Light, a senior analyst at Celent,
a Boston, Mass.-based financial research
and consulting firm. Further, reinsurers
are adapting to growing solvency
requirements and standards by ensuring that they have the requisite capital
to support their business deals.