The Need for Reinsurance

Mark Sidlauskas: Hi everyone! Welcome to the Sapiens Insurance 360 podcast. I’m your host, Mark Sidlauskas, Marketing Director at Sapiens, and I’m so glad you’re out there listening. This is where we discuss the latest news, trends, and issues from across the insurance solutions and technology spectrum.

Ask the average person on the street about what they know about insurance, and it’s safe to say they can give you a fairly accurate description. Every month I shell out hundreds of dollars for my home and auto policy premiums. And the insurance industry is constantly featured in the news whenever there is some catastrophe like a hurricane, wildfire, or flood. So people understand the role of insurance and its purpose. I mention the concept of reinsurance and most people draw a blank. So what is reinsurance and how does it relate to insurance? And what is the need for reinsurance in today’s markets? Here to answer that question and provide us with more information about the need for reinsurance is Sapiens’ VP of Reinsurance Business Development, Craig Robinson. Craig, you were last on the show talking about claims leakage, another key topic in reinsurance. So it’s great to have you back for another session and welcome!

Craig Robinson: Thanks, Mark. It’s great to be back on the program. I don’t think I would have remembered my earlier spot on the podcast if you hadn’t reminded me.

Mark Sidlauskas: How could I forget, Craig? So let’s turn to today’s topic. In a nutshell, how would you define the concept of reinsurance?

Craig Robinson: Well, reinsurance is basically the insurance of an insurer, right? So it’s a financial arrangement, which [the] insurance company, which we call a ceding company or primary company, transfers a portion of its risk to another insurance company, so that’s called the reinsurer. And this is done to reduce the potential for large losses, to stabilize earnings, and increase the insurer’s capacity to underwrite more policies. There’s a couple types of reinsurance. One is treaty that covers a group or portfolio policies. And then there’s another one called facultative, which covers a specific risk, an individual risk, or a policy.

Mark Sidlauskas: So another basic question, what does reinsurance accomplish? Is it simply risk transfer? And how does it differ from regular insurance?

Craig Robinson: Well, risk transfer is central to what it accomplished, but it’s definitely not the only item that is accomplished by reinsurance. So, I mentioned the risk transfer before, about transferring risk from the insurer to the reinsurer. But there’s also capital relief and solvency protection. There’s capacity expansion, there’s earnings stabilities, and one that’s often forgotten is just access to expertise, because reinsurance companies can provide actuarial underwriting claims expertise, which is very helpful to emerging risks and lines such as cyber that companies are getting into.

Mark Sidlauskas: So let’s pivot to the different types of reinsurance. Is reinsurance limited to just the property and casualty carriers?

Craig Robinson: No, no. Reinsurance is not just for property casualty, but it’s also utilized by life and health insurance companies. For instance, reinsurance in the health care sector allows health insurance providers to manage risks that would be challenging to handle on their own, especially when handling, you know, individuals with preexisting conditions and things like that. So, I deal mostly on the P&C side, but there definitely is reinsurance for life and health carriers.

Mark Sidlauskas: Okay. So you’re in the market every day talking to clients. So what do you see as the major challenges that insurance companies are facing running their reinsurance programs?

Craig Robinson: Oh, yeah. There’s a wide variety of issues that they’re facing. One has to do with just inflation and economic volatility. So, you know, high inflation affects the cost of claims, makes it harder to price reinsurance. As far as interest rate goes, it definitely helps the insurers, because they invest a lot of the income, but it introduces volatility in the asset valuations. There’s climate change as we all know, there’s been the increased frequency and severity of cats, which causes uncertainty when doing cat models and things like that. So to keep up with that is very hard. The reinsurance market in general has been very hard. So there’s rising cost and tighter capacity. So following years of large cat losses, reinsurers have increased their prices, which can make it tough for insurers to place the reinsurance, in a lot of instances. There’s, as we know, regulatory pressures, all different types of solvency and capital requirements. There’s NAIC, RBC in the US, there’s Solvency II, there’s IFRS, and then there’s cyber and emerging risks that are coming around, it’s a whole new area, so it’s hard to price things. There’s data and technology issues, legacy systems availability to data, you know, poor incomplete data to do modeling and pricing and placement. And then for a reinsurer, there’s also the limited capacity for retrosession. Retrosession is when the reinsurer itself is then taking out additional reinsurance, spreading the risk further around. So lots of different topics when it comes to challenges for insurance companies and reinsurers.

Mark Sidlauskas: There were a couple of terms there that, maybe you could explain to me when you say cat, what does cat mean?

Craig Robinson: Oh I’m sorry. Yeah. Catastrophe losses. So things like hurricanes.

Mark Sidlauskas: And what is a hard market versus a soft market?

Craig Robinson: Hard market is just when reinsurers are charging higher rates to place the treaties. As I mentioned, the treaties are facultative certificates. So that all has to do with pricing. They can charge more on any given year for a reinsurance arrangement, unless the following year. So the market has been very hard lately over the last many years.

Mark Sidlauskas: Thanks. And my final question involves everyone’s favorite two letters these days, AI. So where do you see the role for AI and reinsurance going forward?

Craig Robinson: I talked a little bit about the cat modeling, which I think is an area that AI can enhance the models, you know, just by incorporating real-time things like satellite imagery, data, etc. There’s underwriting automation. So supporting dynamic data-driven underwriting decisions, pricing models, there would be things like claim management, loss estimations, faster estimation of losses. It’d be fraud detection also contract analysis. So NLP which is natural language processing, where AI might be able to extract key terms and information from the treaties, to give improved clarity or reduce ambiguity, but also from a perspective of, a system like ours, where you can have that information automatically populated within the terms and conditions of the contract. You know, other things that probably would help with competitive analysis, cyber risk, intelligence, things like that, that I can think of.

Mark Sidlauskas: Pretty broad at this point. Lots of different use cases out there for it.

Craig Robinson: Yes.

Mark Sidlauskas: So thanks, Craig. Thanks for giving us the basics of today’s reinsurance market, and also a glimpse of what’s happening in our future and the possibilities of AI. The sky’s the limit for AI, really, so we appreciate you coming back on the show to share your thoughts. To our listeners, as always, we love hearing from you. So if you have any comments or would like to follow us on social media, please reach out to us on our channels and don’t forget to subscribe to the podcast. We’ve got so much more coming, so stay tuned to our Sapiens Insurance 360 podcast. Bye for now!