Reimagining reinsurance strategies

Reinsurance has long been a critical mechanism for insurance carriers to manage risk, optimize capital, and enhance profitability. However, the traditional reinsurance model is now being challenged by various factors like regulatory changes, market forces, and the influx of private equity capital.

The changing reinsurance landscape

While reinsurance remains a vital mechanism for insurers, the traditional reinsurance model is being challenged by several factors.

1. More players in the private equity space: The entry of private equity (PE) firms into the reinsurance space, particularly in the life and annuity sector, brings significant capital and asset management expertise. However, it also introduces new competitors and increases price pressure.
2. Alternative jurisdictions: Regions like Bermuda and the Cayman Islands offer tax efficiencies and more effective risk and capital management, but often come with higher complexity and compliance risks. Plus, alternative vehicles, such as sidecar arrangements, have become increasingly popular given their ability to provide an effective mechanism to raise capital.
3. Market forces: Rising interest rates have driven record annuity sales, leading carriers to seek capital relief through reinsurance. On top of that, rating agencies and regulators are increasingly scrutinizing reinsurance strategies, adding yet another layer of complexity.
4. Changes in accounting standards: The introduction of new accounting standards, such as US GAAP Long-Duration Targeted Improvements (LDTI) and IFRS 17, has necessitated significant adaptations in reinsurance strategies. While optimizing the balance sheet and earnings remains a fundamental objective, companies must also navigate and adjust to these transformational changes in accounting frameworks that have emerged over the past few years.
5. Regulatory shifts: New tax regulations such as the base erosion and anti-abuse tax (BEAT) and global intangible low-taxed income (GILTI) impose additional tax burdens and reporting obligations on cross-border reinsurance transactions, affecting after-tax profitability. As reinsurance structures become more complex, missteps can have significant financial consequences from a tax perspective.

The need to recalibrate

Given these ongoing shifts, insurers and reinsurers need to rethink their reinsurance strategies and operations. A broader, enterprise-wide view is essential to fully unlock the value of reinsurance, and there are a few key questions to consider.

• Do you have the right partners? The influx of PE capital has broadened the pool of reinsurance partners, including traditional reinsurers, private equity firms, and special purpose vehicles. Companies need to assess the financial strength, risk appetite, pricing, and service quality of these partners.
• Do you have the best strategy for your goals? Companies should evaluate their reinsurance objectives, such as growth, profitability, risk diversification, capital optimization, and tax efficiency. It’s crucial to consider whether existing arrangements meet these objectives or if a strategy shift is required.
• Do you have the necessary capabilities? Operational and capability gaps, as well as capacity strains, are hurdles to reinsurance execution. Companies need to ensure they have the right skill sets and modernize their enterprise projection and forecasting capabilities.
• How do you monitor efficacy? Robust data collection and storage approach is essential for monitoring the efficacy of a reinsurance deal. Real-time dashboards with operational, financial, and risk-focused metrics can help companies pivot their strategies as needed.

The Deloitte difference

Deloitte offers a multidisciplinary model and strong capabilities to assist clients throughout the reinsurance life cycle, offering them new opportunities to gain a competitive advantage. We help with evaluating potential reinsurance strategies from an enterprise perspective, assessing the potential value created, and navigating tax and regulatory hurdles. Plus, our reinsurance modeling experience helps clients analyze and optimize financial performance and risk metrics, develop and quantify customized key risk and value metrics, and successfully execute a post-deal operating model and subsequent processes. 

Moving forward

The reinsurance landscape is evolving rapidly, presenting both challenges and opportunities for insurers and reinsurers. To navigate this evolving landscape, companies must ask critical questions about their reinsurance partners, strategies, capabilities, and monitoring mechanisms. Assessing the financial strength, risk appetite, and service quality of potential partners is crucial. Additionally, companies need to evaluate whether their current reinsurance arrangements meet their strategic objectives or if a shift in strategy is warranted. Operational and capability gaps must be addressed to ensure smooth execution, and robust data collection and real-time monitoring are essential for measuring the efficacy of reinsurance deals.

In this new report, explore how Deloitte’s multidisciplinary approach and overall experience in reinsurance modeling and post-deal operations ensures that clients can achieve their strategic objectives and gain a competitive advantage in a changing world.