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Reinsurance as a Strategic Capital Management Solution Presenter’s Name: Greig Woodring, FSA Presenter’s Title: President & CEO RGA Reinsurance Company Event Name: International Insurance Society Seminar Date: June 8, 2010. Reinsurance as a Strategic Capital Management Solution.

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slide1

Reinsurance as a Strategic Capital Management Solution

Presenter’s Name: Greig Woodring, FSA

Presenter’s Title: President & CEO

RGA Reinsurance Company

Event Name: International Insurance Society Seminar

Date: June 8, 2010

reinsurance as a strategic capital management solution
Reinsurance as a Strategic Capital Management Solution
  • Reinsurance has a long history as a capital management tool
  • Use of reinsurance in this capacity has increased steadily and will likely continue to climb
  • Virtually every reinsurance treaty contains some degree of capital leveraging
capital
Capital
  • Different levels of capital:
    • Economic capital, what you think you should hold to support your risks
    • Regulatory capital, what regulators believe you should hold
    • Rating agency capital, what the agencies think you should hold
    • Accounting statement capital, how much capital shows up on your official returns
  • Too much capital may be much better than too little; optimal capital levels balance safety and efficiency
how much capital
How much capital?

Inefficient use of capital

Optimal Capital

Difficulty Attracting Customers

Suggested Minimum

Regulator Supervision

Statutory Minimum

Regulator Intervention

Insolvency

Source: Alex Thomson, Capital costs of Insurance – some empirical analysis

capital1
Capital
  • Capital flows to best risk-adjusted returns
  • Sources of capital:
    • Capital markets for equity, debt, hybrid
    • Sell assets
    • Reinsurance
    • Embedded value securitization

(essentially reinsurance through public markets)

capital2
Capital
  • Value of a company may depend upon how it is financed if financing affects
    • Taxes
    • Borrowing rates
    • Cost of capital
  • “Flight to quality” environments reward strong capital positions
  • Capital markets have not been open during much of the recent crisis
    • Do not overly rely on any single form of capital
  • To determine optimal capitalization
    • Must know what capital you target
    • Must determine the most important metrics: ROE, embedded value, profit per share, etc.
  • Risk adjusted returns have taken on increased prominence
reinsurance as a capital tool
Reinsurance as a Capital Tool
  • Like any type of capital tool, reinsurance has positive and negative features
    • Negatives: introduces large counterparty

limited size compared with vastness of public markets

may be more expensive

may “shrink” the company

    • Positives: speed

no prospectus

no bankers, lawyers

affects both numerator, denominator of capital ratio

shows up as retained earnings (equity)

cost

private (usually)

flexibility

involves reinsurance of a block of business, but can be structured to fit needs

reinsurance flexibility in a capital solution
Reinsurance Flexibility in a Capital Solution
  • Small or large amounts
  • In force or new business
  • Duration
  • Cash or cashless
  • Beneficial tax effects
  • Quick, dependable
  • Range of risk transfer from full to minimal
  • Slope of effects
  • Can be perfect hedge
  • recapture
reinsurance motivations
ReinsuranceMotivations
  • New business financing
  • Eliminate redundant capital
  • Increase liquidity
  • Monetize embedded value to recycle capital
  • Contingent capital
  • Merges & Acquisitions
  • Overall capital planning / management
slide11

Reinsurance as a Strategic Capital Management Solution

Presenter’s Name: Greig Woodring, FSA

Presenter’s Title: President & CEO

RGA Reinsurance Company

Event Name: International Insurance Society Seminar

Date: June 8, 2010