Everybody knows the principles of insurance. You probably have subscribed insurance policies for your flat, your car, personal liability and more. In many countries this is even mandatory.Insurance offers you protection against uncertain damage for a fixed premium. Insurers must therefore be able to absorb these damages and shocks, and to do so, they diversify their portfolio of contracts as much as possible. However, they transfer part of their risks to third party companies: reinsurers.Therefore one may wonder, why do insurers need reinsurance? Isn't it their role to analyse risk and provide protection at a fair pricing against it?
The need for reinsurance
One way to conceptualise reinsurance is to see insurers as a first layer of protection, against single risks. However, this is still a risky business, with for example:
• Accumulation of risks on large natural catastrophes, or terrorist events
• Large risks, which are difficult to diversify (e.g. factories, powerplant, satellites)
• Emerging risks (e.g. cyber)A concrete example could be a hurricane on the east coast of the US, causing billions of dollars in damage. If an insurer holds too large a portion of these damages, it could adversely impact its financial solvency.Insurers therefore need a second layer of diversification to de-risk their business, to protect and optimise their capital. This is where reinsurers enter into action! Reinsurers are able to provide this second layer of protection because they are more diversified: they operate in many markets and regions. The reinsurance industry is therefore by nature a global industry. Reinsurers control their own risk exposures and capital, and can protect themselves through retrocession (third and last layer of protection and diversification) by transferring risks to other reinsurance players.
An unknown but significant industry
Insurers are well known companies given the B2C nature of their activity. They generate globally more than 5 trillion dollars every year in revenue and employ millions of people (150,000 employees in France alone).On the other hand, reinsurers are less known by the general public as they only operate on a B2B basis. The beginning of reinsurance can be traced back to at least the 14th century, when it was used for marine and fire insurance! It is now covering all aspects and lines of business of the modern insurance market.The industry generates 300 billion dollars in revenue every year, which can seem modest compared to the insurance industry, however when you look at the number of players in the industry this is significant. The largest reinsurers make tens of billions of dollars in revenue. In addition to providing reinsurance capacity, reinsurers also generate revenue by supporting cedents (insurers) services in risk, capital and solvency management.
The functioning of the reinsurance industry
Reinsurers generate revenue by taking risks from insurers against a premium, like insurers do with their clients. However transactions are much larger and complex than the usual insurance contracts.There are many types of transactions for insurers and reinsurers to transfer risks. These transactions can be quite complex, are very often tailor-made and involve a lot of players. Several dozen reinsurers can take smaller or bigger parts of a single treaty, negotiating the price, the capacity provided and the wording of the contract.Reinsurance brokers support insurers throughout the process of making transactions, from advising them before the transaction on the structure and amount to be transferred, to negotiating terms and closing the deal. They charge insurers commission on premiums ceded to reinsurers. The actual process to renegotiate transactions (for most of the reinsurance market) is a yearly process which can take up to 4 months. It is a very resource intensive process and has not changed in decades. There was, until recently, no other options available to perform such transactions, and no other options to improve the process. This is what we are changing at Bifröst.
Reinsurance, despite not being well-known, plays a significant role in the stability of the insurance market, and more widely the global economy. At Bifröst, we are convinced that reinsurance market participants (insurers, reinsurers, brokers) could work more efficiently, using new technologies and AI, and this is what we are bringing to the industry.Our solution, a decision support tool for insurers, brokers and reinsurers, enables them to manage their end-to-end renewal process more efficiently than is currently possible. It gives their teams the power and the ability to:
• Take the best decisions backed by data
• Track and report on the placement situation, with a global view on their portfolio
• Optimise their reinsurance processes
Reinsurance teams remain in charge of taking the final decision, but with the power of AI!