More Insurers Using Reinsurance Strategy To Manage Volatility

The latest risk appetite survey from Willis Towers Watson confirmed that risk appetite is increasingly central to insurers' business decisions. The survey found that, more and more, insurers are using reinsurance for earnings protection and volatility reduction. According to the report, this shift in motivation for buying reinsurance is largely driven by investor pressure, which is causing insurers to move to more sophisticated metrics, such as return on equity and economic capital.

Insurer purchasing is increasingly guided by "risk appetite statements" deployed to optimize capital management and profitability targets. The survey report revealed that 80 percent of insurers consider their risk appetite statements when defining their reinsurance strategies.

Of 260 insurers from 51 countries surveyed, 98 percent said they have adopted a formal risk appetite or intend to within 3 years. While respondents' enterprise risk management capabilities have improved, the report said that more progress is needed to achieve companies' risk-culture goals. Meanwhile, cyber still looms as the main risk concern for most respondents, due largely to difficulties in defining and managing cyber both from the underwriting and operational perspectives.

"Managing the volatility of underwriting results is of prime importance to insurers, and reinsurance strategy measured by risk appetite is key to that," said James Kent, global CEO, Willis Re. "This is particularly relevant for public companies where perceived volatility can severely impact share price, but also a wider range of insurers are now much more likely to consider a broad range of consolidated earnings metrics ... when assessing the impact of reinsurance. Our survey shows that the number of non-life insurers using rate of return on equity as their primary earnings metric has doubled in the past 2 years. This is in line with what we are currently experiencing in the field when realigning reinsurance programs to insurers' strategies."

Most Valued Earnings Metric for Setting Reinsurance Strategy

Alice Underwood, global leader, insurance consulting and technology, said, "Changes to the global regulatory environment have increased the emphasis on capital measures and targets. Although regulatory capital is still the most relevant capital measure, economic and catastrophe risk capital are gaining momentum. The use of internal capital models increased substantially from a third to more than half of insurers between 2015 and 2017."

Which of the Following Capital Measures Is the Most Important to Your Reinsurance Decisions?