LONDON, September 8, 2008 – Towers Perrin, a global professional services firm, announced today that the insurance industry needs to take a strategic approach to reinsurance buying to drive down rising capital costs. Programme optimisation, the firm said, is the key to ensuring that reinsurance creates maximum value, and has the most significant impact on capital requirements.
“In the short-term, the credit crunch has complicated the debate over whether to raise traditional capital or buy reinsurance cover,” said Vicky Carter, Chairman of Towers Perrin’s UK Reinsurance business. “By elevating the price of debt products, it has made raising capital more expensive and therefore reinsurance more attractive, especially as rates have fallen in the first half of the year. So, with reinsurance becoming more popular, it will be more important than ever to achieve maximum value through programme optimisation.”
Programme optimisation is integral to the risk and capital management of an insurer. By using an economic capital model to quantify its risk exposures, and then by considering reinsurance as a form of capital, insurers can make certain they are getting the best out of their reinsurance programme. This optimised approach is likely to lead to an increased popularity of structured products, such as stop-loss cover.
“Insurers are increasingly adopting a more strategic approach to reinsurance buying” said Jon Tilman, Towers Perrin’s European Property/Casualty Insurance Practice Leader. “Insurers are looking to buy in accordance with corporate (rather than business unit) risk appetite and the leading companies understand that if they can optimise both risk retention and the cost of capital then they can create significant value for shareholders. Not only that, but insurers that want to use their internal model to calculate their capital requirements under Solvency II will need to prove to the regulators that they are using it to make real business decisions. Programme optimisation is a great way of doing that,” added Tilman.
About Towers Perrin
Towers Perrin is a global professional services firm that helps organizations improve performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, program design and management, and in the areas of risk and capital management, insurance and reinsurance intermediary services, and actuarial consulting. Towers Perrin has offices and alliance partners in the United States, Canada, Europe, Asia, Latin America, South Africa, Australia and New Zealand. More information about Towers Perrin is available at www.towersperrin.com.
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