“Reinsurance is becoming more and more important.”

What role does a reinsurer play compared to a primary insurer?

A reinsurer assumes insurance risk that exceeds the risk appetite of the primary insurer. This primarily applies to natural disasters, but also applies to other large risks, such as major industrial risks.

What advantages does this provide for primary insurers, including advantages related to solvency capital?

Reinsurance allows an insurance company to underwrite risks that would otherwise represent too great a burden for its balance sheet and solvency. In addition to risk transfer, reinsurance therefore also acts as a form of capital substitution. Introduction of the Solvency II rules in 2016 will considerably increase the capital and risk management requirements of insurance companies. The importance of reinsurance will continue to grow.

How do reinsurers protect themselves against major events?

Reinsurers utilise what is known as retrocession (reinsuring with other companies) to cover their peak risks. Capital market instruments have also been increasingly used in recent years, such as insurance securitisation.

Is our impression correct that the number and intensity of natural disasters has been steadily rising?

Yes, a significant increase in natural disasters has actually been recorded over the last 20 years. We have to assume this is not a random occurrence, but is instead partially due to global climate change. This presents major challenges for the insurance industry. In particular, analytic models are becoming more important for assessing risks. However, given the increase in “once-in-a-hundred-years events” I would caution against too great a reliance on models. The good news is that no shortage is expected for natural disaster reinsurance. On the contrary, reinsurance is currently less expensive than it has been for a long time.