Maximising strenght for the future

EU directives such as Solvency I/II and IFRS increase the insurance industry's capital requirements. Investment in new business opportunities also requires capital. Active risk and capital management can free up capital and retrospective reinsurance is an interesting tool to consider in this context.

EU advocates transparency and measurability

From 2005, listed companies in the EU will have to base their consolidated financial statements on International Financial Reporting Standards (IFRS). Closely linked with these standards are Solvency I and II, the new directives for determining the capital requirements to be met by insurers.

The objective of the new standards is to make the values of insurance contracts, portfolios and entire companies measurable on a uniform international basis. They are geared to meet the desire for greater transparency and security on the part of investors and analysts and ultimately also for policyholders.

These new supervisory regulations make an explicit distinction between the premium risk and reserve risk. Both sides of the balance sheet have to be covered with sufficient risk capital.

Especially in the case of liability insurers, many years often pass between the date of a loss incurred and its final payment. The reserve risk commits capital for long periods of time and thus restricts an insurer's business opportunities.

Our centre of competence Customized Portfolio Solutions (CPS) provides a solution for transferring the risk of long-term financial burdens for losses already incurred to the reinsurer: retrospective reinsurance.

Two forms of retrospective reinsurance

Munich Re offers two forms of retrospective reinsurance: loss portfolio transfers (LPT) and adverse development covers (ADC). Under an LPT, the reinsurer accepts an agreed percentage of an insurer's cumulative loss payments and the LPT will generally provide a treaty limit that is in excess of the anticipated claims burden. The insurer is thus additionally protected against a higher claims burden than reserved for.

Unlike LPTs, ADCs do not cover a specific percentage but attach in excess of an agreed amount of the cumulative loss payments. Therefore, they primarily protect insurers against an adverse development in the loss portfolio covered. LPTs and ADCs are tailored to a client's requirements and are often provided in combination.

Munich Re's retrospective reinsurance solutions are an attractive option for insurers seeking to remain competitive while improving their risk and capital management.

Find out more about Customized Portfolio Solutions and retrospective reinsurance in our topical publications or from our CPS specialists themselves.