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 […]
The reinsurance industry has been largely fragmented till now. This is why it is common for ceding insurers to buy different reinsurance policies for their different lines of business.
For instance, ceding insurers may buy separate reinsurance policies for their marine business and their property insurance business. In insurance parlance, these lines of businesses are called “towers”.
Up until now, reinsurance was strictly segregated into towers. However, with the passage of time, reinsurance service providers, as well as buyers, have both realized that there are specific advantages to having an aggregate policy that combines different towers instead of having separate policies. These types of reinsurance policies are fairly new and hence are called non-traditional policies.
In this article, we will have a closer look at what are the benefits of combining various reinsurance towers for both the ceding insurer as well as the reinsurance service provider.
Hence, fewer reinsurance companies are willing to provide this cover. As a result, ceding insurers have to pay a higher premium to obtain this coverage. However, when ceding insurance companies combine multiple covers, they are able to obtain this extended coverage easily and at an affordable price. This is why many ceding insurers nowadays prefer to combine multiple towers.
Firstly, due to the overlapping nature of these insurance contracts, it can be very difficult to identify such redundancies. Even if they are identified, it can be very difficult to get these redundancies excluded from any one contract.
Eventually, redundancies can also become a source of conflict when actual payouts have to be made. It is possible for the reinsurers to resort to litigation in order to avoid paying claims.
Hence, when a ceding insurer uses a multi-tower approach, they end up eliminating redundancies. This is one of the reasons why a multi-tower non-conventional reinsurance policy is cheaper than a traditional reinsurance policy.
From a ceding insurer’s point of view, it can become very difficult to meet the minimum capacity requirements in all the towers. This is because the amount of risk underwritten may vary in each tower. It may also vary from year to year.
If the volume of business in a particular tower is low in a given year, then it may be difficult to find reinsurance for the same. Hence, when a ceding insurance company uses a multi-tower non-conventional policy, they are able to circumvent these minimum capacity requirements and reinsurers are legally bound to provide them with services regardless of the quantum of business provided by individual towers.
When ceding insurers sign non-conventional multi-tower policies, they are consolidating all their business into one unit. As a result, the size of the business increases. This makes it attractive to more reinsurance companies. This creates a situation wherein the ceding insurer has a higher bargaining power and hence can demand a better price.
However, ceding insurers need to be careful while selecting their reinsurance partner. This is because non-conventional policies also mean that the ceding insurers' risk will be concentrated with a single counterparty. The economic failure of that counterparty could have disastrous ramifications for the ceding insurer.
Also, the procedure to make the claims may be different in different companies. As a result, a higher degree of complication gets built into the process. These complications can be both cumbersome as well as expensive. It is possible to eliminate this additional effort and expense when a ceding insurer signs a multi-tower non-conventional reinsurance policy.
To sum it up, even though multi-tower reinsurance policies are relatively new, they have been growing rapidly in popularity. Reinsurance companies across the world now have to adjust to this new reality. The failure to do so might lead to loss of market share in the short run and extinction in the future.
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