The "golden" dynamics of the ART and reinsurance relationship

One of the most enticing aspects of owning an alternative risk transfer (ART) facility is that it provides corporates entr'e to reinsurers, reinsurance structures and reinsurance markets that they would not otherwise have access to. The dynamics of the business relationship between a professional reinsurer and ART provider offers the reinsurer (which could also be a direct insurer acting in a reinsurer capacity for a specific transaction), the ART provider and facility owners the opportunity to be very innovative in structuring a solution for the client's needs.

In the traditional market, the reinsurer is far removed from the insured and there is often little or even no risk management incentive for either party. The insurer merely seeks to offset the risk and the reinsurer chooses whether or not to accept the price. In this market, many if not most clients are simply looking for the cheapest rates, and there is very little shared risk and reward relationship between the reinsurer and the insured.

In the ART world it's very different: the ART provider actively seeks to create a three way partnership between itself, its facility owners and the reinsurer. The latter is involved up front in the programme's development, and it is tailored to work for both the reinsurer and the ART facility owner.

One of the cornerstones of ART solutions is that facility owners understand and appreciate the benefits of prudent risk management. If the facility is not making money the reinsurer will ask for underwriting interventions to be put in place and the facility owner would have a vested interest in doing so.

Essentially, since the ART provider has nothing to gain by selecting against the reinsurer they are able to develop a genuine business partnership rather than a user/supplier relationship. And it is in the interest of all three parties (the ART provider, the facility owner and the reinsurer) to forge long-term partnerships.

The flexibility inherent in the ART market provides many opportunities for reinsurers and ART facility owners to enter into arrangements designed specifically around the facility owner's business requirements at a particular time. Take the example of a facility owner launching a new product that, as a result of high upfront expenses, requires a large capital injection in year one. If the profitability of the product is high enough, the reinsurer can finance the injection through an original terms reinsurance arrangement, which may work out cheaper than more conventional forms of finance. This effectively amounts to the facility owner using the reinsurer's balance sheet for new business strain reserving purposes rather than merely using the reinsurer as a dumping ground to transfer risk.

In the case of a start-up business without the infrastructure and volume to operate on its own, the reinsurer can take a large chunk of the risk up front, with the agreement that the facility owner takes on more risk as the business grows.

Or the reinsurer can buy the right to future income from the facility owner, essentially injecting capital into the business in the short-term and receiving higher premium in return in the long-term.

In a nutshell, the essence of the ART and reinsurance relationship is creating win-win solutions in the short-term supported by long-term relationships based on the principle of sharing risk and reward.

For further information please contact:
Herman Schoeman, MD of Guardrisk
Telephone: 011 669-1001

Prepared by:
Melanie Davis, PR@Work
Telephone: 011 615-3309 / 083 225 7450