Guy Carpenter has published a new report titled, “Structured Reinsurance: Impact on Health Product Pricing,” which delves into how structured reinsurance can influence pricing strategies in the health insurance sector.
The report highlights the ability of structured reinsurance to enhance capital efficiency, reduce costs, and assist insurers in fulfilling regulatory obligations while pursuing growth opportunities.
One key focus of the report is the evolution of Risk-Based Capital (RBC) standards, which have transformed insurance regulation by tailoring capital requirements to the specific risks faced by individual insurers. Before the advent of RBC standards, insurers adhered to uniform capital requirements that did not account for differences in size or risk profile.
Guy Carpenter’s analysis underscores how RBC standards introduced a more dynamic regulatory framework. This approach aligns capital requirements with the risks insurers undertake, fostering financial stability and safeguarding policyholders.
To address these regulatory demands, emerging insurance carriers often adopt quota share reinsurance to transfer a portion of their risk to reinsurers. This strategy reduces capital requirements and helps manage the volatility associated with writing new business. However, the report notes that quota share reinsurance involves trade-offs, as insurers must share potential profits with their reinsurers.
For established carriers, RBC requirements can constrain the capital available for growth and investment, thereby limiting opportunities for innovation and diversification. Guy Carpenter’s report positions structured reinsurance as a viable solution to these challenges.
By customizing reinsurance arrangements to specific needs, structured reinsurance enables insurers to optimize capital usage, ensuring regulatory compliance while pursuing strategic objectives.
The report identifies several advantages of structured reinsurance. These include extending the premium-to-capital ratio, which allows insurers to increase their business volume without expanding their capital base. Additionally, the cost of structured reinsurance is often lower than the cost of using the insurer’s own capital, which can improve return on equity.
Structured reinsurance can also unlock the embedded value in a ceding company’s business. This can lower pricing loads and enhance operational efficiency, making it an attractive tool for insurers seeking to balance growth and compliance.
The report emphasizes the pivotal role of structured reinsurance in helping insurers navigate complex regulatory environments while retaining the flexibility needed for growth and innovation.
Guy Carpenter concludes that structured reinsurance offers a strategic means for insurers to balance risk and reward, enabling them to achieve long-term objectives while managing capital effectively.
