Intra Group Reinsurance

In the previous articles, we have already studied about the concept of reinsurance. However, the reinsurance we have studied is a contract between two independent parties. This means that a ceding insurance company often transfers the risk to an external third-party reinsurance service provider.

The risk actually moves out of the balance sheet of the ceding entity and even the ceding group. However, this is not necessarily the case. There are many ceding insurance companies that have another entity from their own group which acts as a group reinsurance company. These ceding insurers generally follow a strategy which is called intra-group reinsurance.

In this article, we will explain what intragroup reinsurance is and why it is considered to be effective by many ceding insurance corporations.

What is Intragroup Reinsurance?

As mentioned above, some ceding insurance companies have their own reinsurance companies which form a part of the group. Hence, instead of ceding their insurance to a third-party reinsurance company, they cede it to their own group reinsurer. When this strategy is used, the risk is transferred out of the balance sheet of a particular entity of the group. However, it is added to the balance sheet of another entity within the group. Hence, the level of risk within the group continues to remain the same after intragroup reinsurance. The group reinsurance company generally consolidates the risk of the entire group and then decides whether to keep it on its balance sheet or use retrocession to transfer it to a third party.

Factors Determining Intragroup Reinsurance

Intragroup reinsurance may not be a suitable strategy for each and every ceding insurance company. There are certain factors that must be present in place in order to allow intragroup reinsurance to function.

• Fungibility: Fungibility means that the group companies must have the ability to interchangeably use capital. Hence, if the capital from Group company A is removed and infused into Group company B, it should not create legal or regulatory problems.

  Generally, if there are any minority stakeholders in company A or B, this may not be possible since the minority shareholders may allege that their interests are being compromised and the other group company is benefitting at their expense. However, if the subsidiaries are fully owned by the parent company, then it may be possible to use the capital in a fungible manner.

• Transferability: It is also important to note that intragroup reinsurance is only possible if insurance companies are permitted to transfer risks to other group companies. This may not be permitted by regulatory authorities particularly if the risk is being transferred overseas.

  Regulatory agencies want to ensure that they have complete control over the risk. Hence, they generally do not permit the risk to be transferred overseas.

Benefits of Intragroup Reinsurance

Intragroup reinsurance is used by many companies since there are certain benefits to using the same. Some of the most common benefits have been listed below:

• Tax Benefits: Firstly, it is important to note that the tax regimes in some countries are more favorable to reinsurance companies. Hence, many ceding insurance companies use intragroup reinsurance as a tax-saving mechanism. This means that they transfer their risk to a group entity that is based in a tax haven. This allows them to show an expense in the country where the risk is originating.

  It is important to note that transfer pricing laws apply to reinsurance companies as well. Hence, the transfer of risk has to be fairly priced as per market rates.

• Economies of Scale: It is a known fact that reinsurance companies are looking for large-scale businesses. Hence, when several small group entities transfer their business to a large group entity, they create a situation where economies of scale are created.

  These economies of scale allow the companies to have the required bargaining power which further allows them to lower the cost of reinsurance and increase their own bottom line!

• Regulatory Management: In many parts of the world, there are regulations in place that mandate companies to have a certain amount of reinsurance in place.

  There are many ceding insurance companies who would like to keep the risk on their books but are compelled by the regulations to transfer the risks to a reinsurance company. In such cases, they use their own reinsurance companies in order to be able to comply with the regulation and still continue to keep the risk on their own books.

• Capital Management: Last but not the least, intragroup reinsurance companies are used all over the world as a mechanism for managing the scarce amount of capital.

  Group reinsurance companies allow a cash-starved subsidiary to offload some of the risks to the parent and obtain cash in hand. This cash in hand is then used to obtain more market share by underwriting more policies. Hence, the group reinsurance company acts as an entity that provides reinforcement of capital to other group entities that have the highest chance of underwriting viable businesses.

The fact of the matter is that intra-group reinsurance companies are an important part of the overall economic structure used by large-scale ceding insurance companies. They also form a small but important part of the overall reinsurance industry.