Excess of Loss Protection Over Quota Share Reinsurance Deals
The insurance industry has been facing rising challenges in recent years. Increasing regulatory scrutiny along with regulatory solvency regimes, fierce competition and unprecedented low and negative interest rates are putting pressure on insurer balance sheets and profit margins. In light of these challenges and the current global pandemic, insurers are motivated to limit their risk exposure as much as possible by ceding excess risk to a counterparty.
In P&C insurance segments, in which claims are frequent with rare random fluctuations, a common form of limiting risk exposure is entering Quota Share deals, splitting portfolio losses proportionally with a reinsurer at a predefined rate.
Quota Share deals provide a certain amount of protection for the insurer, but reinsurance capacity is often limited and usually insurers retain 20-40% of the risk on their balance sheet. Furthermore, in insurance segments with constant high loss ratios, it will be less attractive for reinsurers to enter Quota Share deals, thus raising deal pricing significantly.
Reinsurers have also been under pressure due to the low interest rate environment, an increase in the frequency and extent of natural disasters and a volatile capital market. What’s more, the economic crisis as a result of the global Covid-19 pandemic is expected to cause heavy losses to reinsurers. As a result, reinsurers are raising premium rates and reducing exposure even further.
In order to bridge the financing gap, companies with a significant share of P&C insurance SCR requirements can benefit from Excess of Loss (XoL) coverage in addition to Quota Share, a type of non-proportional coverage in which the counterparty (capital market investor or reinsurer) covers the losses exceeding a certain threshold. Xol provides balance sheet and P&L protection for the retained risk from Quota Share coverage against the impact of singular heavy large claims, in addition to relief in regulatory solvency requirements and capital.
Here at Vesttoo, we have developed innovative AI-based XoL de-risking programs, transferring risk as a derivative to capital market investors, taking advantage of the immense capacity of the capital markets, which reduce regulatory solvency requirements. These deals are usually structured as unfunded stop loss swaps between cedents and capital market investors, under ISDA guidelines.
Our proprietary AI and machine-learning based derivative programs employ accurate and objective stochastic modeling methods based on a specific tranche of claims. These advanced stochastic risk models give Vesttoo the ability to model insurer data and to transfer the risk to the capital markets in a very short time.
Vesttoo’s de-risking programs are priced at an annual low premium (compared with traditional reinsurers), with no upfront fees or frictional costs which can help insurance companies withstand these turbulent times. Capital market investors substitute traditional reinsurers on the other end of the deal, taking advantage of the benefits the capital markets have to offer. Insurers benefit from efficient, cost-effective capital management with comprehensive protection, releasing capital and allowing them to maintain their competitive edge and increase profit margins.
Contact us today to hear more about our innovative risk transfer solutions!
Vesttoo has developed advanced technologies for data-driven risk management, transferring actuarial risk to financial risk through the capital markets. Vesttoo specializes in risk modeling and alternative risk transfer for the Life and P&C insurance markets, providing insurers with a low-cost strategic risk management solution for immediate capital relief, value enhancement and liability hedging.
