Reinsurance Returns

by

Peter M. Wilson, CPA, FLMI

The week of September 14-20, 2008 will be remembered for the loan by the federal government to AIG to keep them afloat.  But I believe in the long run for the industry it will be remembered for the return of reinsurance as a means to provide capital to the insurance industry.

For too long non-insurance entitites have been playing in the insurance marketplace.   Whether it be securitization, derivatives, or stranger owned life insurance the regulatory oversight process is threatened by these outside parties.

As any reader of our newsletters knows, Mystic has been a leading advocate of coinsurance.  In the late 1980's it became apparent that the other forms of financial reinsurance were losing favor with certain state regulators.

Mystic and others of the reinsurance community vigorously opposed the regulators' position on sound risk transfer principles.   We still strongly believe that those regulations limit competition and increase the costs of reinsurance and capital for ceding companies.

Having made our opposition known, we continued to advise ceders and reinsurers to comply with both the letter and spirit of their state regulatory requirements.  This meant that products had to be re-priced or some other permanent solutions to capital needs had to be found.
At the same time that financial reinsurance evolved from co-mod co to straight coinsurance non insurance players entered the marketplace.  These players using the securitization techniques of Wall Street monetized insurance liabilities.  Unfortunately, these players used short term funds to securitize long-term liabilities.  Or, in other extreme situations (AIG and General Re) did not transfer any risk in their reinsurance transactions.   We have also had investors and policyholders burned by their participation in the stranger owned life insurance market.   Just another example of the unintended consequences of when non insurance players participate in the business of insurance.

As we approach the second decade of the 21st century, we applaud the return of providing reinsurance(capital) by reinsurers to insurance companies utilizing coinsurance with complete risk transfer.

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