Widely advertised corporate failures and the European Commission’s Solvency II initiative are exerting pressure on insurers worldwide to improve their risk and capital management capabilities and to adopt a unified and integrated approach towards the management of their risk profile and capital base. Against the backdrop of these developments, the study focuses on one of the fundamental risk and capital management tools available to insurance companies worldwide, namely reinsurance. The objective is to evaluate reinsurance within the risk and capital management structures and processes of Maltese insurance providers writing general business of insurance.
Table of Contents
1. Introduction
1.1 Background Information
1.2 Relevance of Study
1.3 Research Objective
1.4 Scope and Limitations
1.5 Dissertation Overview
2. Literature Review – Principles of Risk and Capital Management
2.1 Introduction
2.2 The Concept of ‘Economic Capital’
2.3 Economic Capital and Regulatory Capital
2.3.1 Solvency II – A Risk-Based Capital Framework
2.4 Economic Capital in Enterprise-wide Risk Management (ERM)
2.5 The Benefits of ERM
2.6 The Other Side of the Coin
2.7 Conclusion
3. Literature Review – Reinsurance as a Risk and Capital Management Tool
3.1 Introduction
3.2 Basic Principles of Reinsurance
3.2.1 Methods of Reinsurance
3.2.2 Types of Reinsurance
3.2.3 Forms of Reinsurance
3.3 Reinsurance within an ERM Framework
3.3.1 Risk Management Strategy
3.3.2 Identification and Assessment of Underwriting Risk
3.3.3 Definition of Risk Appetite
3.3.4 Risk Mitigation
3.3.5 Risk Measurement
3.4 Functions of Reinsurance in Risk and Capital Management
3.4.1 Capacity
3.4.2 Risk Spreading
3.4.3 Stability
3.4.4 Economic and Regulatory Capital Relief
3.4.5 Other Financial Benefits
3.4.6 Expertise
3.4.7 Protection
3.5 The Costs and Risks of Reinsurance
3.5.1 The Costs of Reinsurance
3.5.2 Risks Arising from Reinsurance
3.6 Reinsurance Management
3.6.1 Reinsurance Management Strategy (RMS)
3.7 Development of an Optimal Reinsurance Program
3.7.1 Setting Retentions
3.7.2 Choosing the Method of Reinsurance
3.7.3 Choosing the Type of Reinsurance
3.7.4 Choosing the Form of Reinsurance
3.7.5 Selecting Reinsurers
3.7.6 The Role of Reinsurance Brokers
3.8 The Impact of the Reinsurance Program on Economic Capital
3.8.1 Solvency I
3.8.2 Solvency II
3.9 Alternative Risk Transfer Mechanisms (ARTs)
3.9.1 Types of ARTs
3.9.2 The Benefits of ARTs
3.9.3 The Future of ARTs
4. Research Methodology
4.1 Introduction
4.2 Research Method
4.2.1 Preliminary Data Collection
4.2.2 Literature Review
4.2.3 The Empirical Phase
4.3 Reasons for the Choice of Methodology
4.4 Design of the Interview Schedule
4.5 Data Analysis
4.6 Conclusion
5. Findings
5.1 Introduction
5.2 ERM
5.2.1 ERM Pillars
5.2.2 Capital Management within ERM
5.2.3 Responsibilities for ERM
5.2.4 Benefits and Challenges of ERM
5.3 RMS
5.4 Functions of Reinsurance in Risk and Capital Management
5.5 The Costs and Risks of Reinsurance
5.5.1 Costs of Reinsurance
5.5.2 Risks Arising From Reinsurance
5.6 Development and Implementation of the Reinsurance Program
5.6.1 Setting Retentions
5.6.2 The Methods of Reinsurance
5.6.3 The Form and Type of Reinsurance
5.6.4 Selecting Reinsurers
5.6.5 Impact of the Reinsurance Program on Economic Capital
5.6.6 Technical Results
5.7 ARTs
5.8 Conclusion
6. Discussion of Findings
6.1 Introduction
6.2 ERM
6.2.1. The State of ERM
6.2.2. Perceptions of ERM
6.2.3. The Approach Towards Risk Management
6.2.4. The Approach Towards Capital Management
6.3 Reinsurance Management Practices
6.3.1 RMS
6.3.2 The Involvement of the Board
6.3.3 The Role of the Reinsurance Broker
6.4 The Process of Setting Retentions
6.4.1 The Initial Setting of Retentions
6.4.2 Changes in Retentions
6.4.3 Methodology Underlying Retention Changes
6.5 The Method, Form and Type of Reinsurance
6.5.1 The Methods of Reinsurance
6.5.2 The Forms and Types of Reinsurance
6.5.3 Exclusive Use of Non-Proportional Reinsurance
6.6 Selecting Reinsurers
6.7 Conclusion
7. Summary, Conclusions and Recommendations
7.1 Introduction
7.2 Summary
7.3 Conclusions
7.4 Recommendations
7.4.1 Recommendations for Local Companies
7.4.2 Recommendation for Managed Companies
7.4.3 Recommendations for the Regulator
7.5 Areas for Further Research
7.6 Concluding Note
Research Objectives and Themes
The primary goal of this dissertation is to evaluate the role of reinsurance as a vital tool for risk and capital management within local insurance providers operating in Malta. The research seeks to assess how these companies integrate reinsurance into their broader Enterprise-wide Risk Management (ERM) frameworks and the extent to which they understand its implications for their net risk exposure and capital requirements, particularly in anticipation of the Solvency II regulatory changes.
- The integration of risk and capital management within the local Maltese insurance sector.
- The functions, benefits, and costs of reinsurance as a strategic management tool.
- The formulation and implementation of Reinsurance Management Strategies (RMS).
- The impact of reinsurance on economic capital and regulatory solvency positions.
- Perspectives from both local insurance companies and regulatory authorities regarding reinsurance practices.
Extract from the Book
1.1 Background Information
The term “reinsurance” has been defined in different ways by various writers. The most prevalent and arguably the most concise definition is that reinsurance is insurance for primary or direct insurance companies. Reinsurance contracts therefore insure contractual liabilities to pay claims arising out of contracts of insurance (Carter et al, 2000).
The reinsurance contract is an agreement between the insurer and the reinsurer and is separate and distinct from the insurance contract entered into by the policyholder and the insurer. Therefore, unless cut-through clauses oblige the reinsurer to pay amounts directly to the beneficiaries of the original policies in certain specified circumstances, the reinsurance contract does not establish any kind of legal link between the insured and the reinsurer (Cascun, 1994).
Since reinsurance is a form of insurance, it follows that certain basis principles, practices and concepts pertaining to direct insurance apply equally to reinsurance. In fact, both primary insurance contracts and reinsurance contracts fundamentally embody a promise of future payment upon the happening of specified uncertain future events, in return for the payment of a premium. Yet, reinsurance is such a specialised and distinctive form of insurance that it often merits consideration as a category of its own. In spite of its peculiarities, reinsurance remains an integral and indispensable part of the insurance system, providing policyholders with higher security at lower cost.
Summary of Chapters
1. Introduction: This chapter provides the foundational background on reinsurance, justifies the study's relevance in the context of global market conditions and upcoming regulatory changes, and outlines the primary research objectives.
2. Literature Review – Principles of Risk and Capital Management: This chapter explores the theoretical concepts of economic capital and Enterprise-wide Risk Management (ERM), highlighting the shift towards risk-based capital regimes like Solvency II.
3. Literature Review – Reinsurance as a Risk and Capital Management Tool: This chapter examines the mechanics of reinsurance, detailing different types and forms of contracts and analyzing their role in risk mitigation and capital management.
4. Research Methodology: This chapter describes the empirical approach taken, including the use of in-depth personal interviews with Maltese insurance companies and the regulator to gather primary data.
5. Findings: This chapter presents the empirical data gathered, documenting the current state of ERM, the use of Reinsurance Management Strategies, and the challenges companies face in managing their reinsurance programs.
6. Discussion of Findings: This chapter critically analyzes the findings, identifying gaps in current practices and discussing the implications of the fragmented approach to risk and capital management in local companies.
7. Summary, Conclusions and Recommendations: This final chapter synthesizes the study's conclusions and offers targeted recommendations for local companies, managed companies, and the regulator to improve risk management practices.
Keywords
Reinsurance, Risk Transfer, Risk Management, Capital Management, Economic Capital, Enterprise-wide Risk Management, ERM, Solvency II, Malta, Insurance, Underwriting, Risk Appetite, Regulatory Framework, Risk Mitigation, Risk Modeling.
Frequently Asked Questions
What is the core focus of this dissertation?
The dissertation focuses on evaluating how reinsurance is used by Maltese insurance companies as a strategic tool for managing their risk profiles and capital base within their wider Enterprise-wide Risk Management (ERM) frameworks.
What are the primary themes discussed?
Central themes include the principles of economic capital, the role of reinsurance in risk transfer, the transition from traditional solvency regimes to the risk-based Solvency II framework, and the current state of ERM among local insurance providers.
What is the main objective of the research?
The objective is to assess the current role played by reinsurance in the Maltese insurance sector and to determine whether local companies possess the necessary structures and models to fully understand and optimize the implications of their reinsurance decisions.
What methodology does the author employ?
The author uses a qualitative empirical methodology, conducting in-depth personal interviews with representatives from local insurance companies, senior management from insurance management firms, and officials from the Maltese insurance regulator.
What does the main body of the work cover?
The work provides a thorough literature review on risk and capital management principles and the technical aspects of reinsurance, followed by the presentation and discussion of empirical findings gathered from the local Maltese insurance industry.
Which keywords characterize this research?
The study is characterized by keywords such as Reinsurance, Risk Transfer, Enterprise-wide Risk Management (ERM), Economic Capital, Solvency II, and Capital Management.
How does Solvency II influence the findings of the study?
Solvency II is a major driver of the study; the research highlights that while Solvency II encourages a more holistic, risk-based approach, many local Maltese companies are currently ill-equipped to meet its requirements due to the absence of robust internal risk and capital models.
What is the significance of the "Reinsurance Management Strategy" (RMS) highlighted in the study?
The RMS is identified as a critical component of a sound ERM framework. The study concludes that many local companies lack a formal, documented RMS, which hinders their ability to effectively coordinate their reinsurance programs with their overall risk appetite and capital management objectives.
- Citar trabajo
- Leonard Sammut (Autor), 2008, Reinsurance in Risk and Capital Management, Múnich, GRIN Verlag, https://www.grin.com/document/134780
