Cyber Risk in Reinsurance
February 12, 2025
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Under normal circumstances, a reinsurance company operates as a partner with its ceding insurance company. The reinsurance company wants to ensure that good service is provided to the insurance company and that losses are shared as per the contract. The reinsurer has a vested interest in providing customer service i.e. the reinsurer expects the ceding insurer to bring their business back to them. However, there may be certain situations when a reinsurance company decides to no longer accept new business. This may be because of a pending merger or acquisition. It could also be because the reinsurance company may be nearing bankruptcy and may be close to liquidation. In either case, the reinsurance company ceases to underwrite future contracts and instead focuses on serving its existing contracts. Such a type of reinsurance is called run-off reinsurance.
There is no industry-wide accepted definition of run-off reinsurance. However, the gist has been explained above. The reinsurance company would no longer accept new risks or underwrite new contracts. Instead, the reinsurance company would continue to fulfill its contractual obligations till the contracts are in force and then would stop operations.
Now, the question is, why is the fact that reinsurance company does not underwrite new contracts significantly? The answer is that it changes the motive of the reinsurer. This changed motive does have an impact on the operations of the reinsurer. Reinsurers in run-off do not care about the customer service they provide. This is because they are not planning to get repeat business. Instead, the focus of reinsurance companies in the run-off is to minimize the payouts. As a result, reinsurance recoverable generally become more difficult to collect from such companies.
There is no feeling of partnership between the ceding insurer and the reinsurer when the latter is in run-off. Most reinsurers who are in run-off are trying to preserve their assets by minimizing their liabilities. The higher the value of their assets is, the more they will be able to distribute back to their shareholders.
However, there is still a contractual relationship between them. Hence, the reinsurer would still owe money to the ceding insurer, if an adverse event takes place causing a loss. However, it is possible that the reinsurer may not be able to pay off 100% of the claim or may take an exceptionally long period of time in order to finally pay off the claim.
Reinsurance companies are required by law to ensure that their operations continue to exist in one form or another. Reinsurance companies in run-off tend to continue their operations in one of three ways:
Over the years, ceding insurance companies have had several negative experiences with run-off reinsurance companies. This is the reason why they have become more diligent and have now started including the run-off scenario within the contract wording. Some of the clauses which are included in the reinsurance contract are as follows:
The fact of the matter is that run-off scenarios are more common in the reinsurance industry than one might imagine. Hence, it is important for both the ceding insurer as well as the reinsurance company to be fully aware of the possible outcomes and have plans in place to mitigate any issues that might arise.
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