Cyber Risk in Reinsurance
February 12, 2025
When an individual or a company takes an insurance policy, the risk that they are indemnifying themselves against is very clear. For instance, if a person takes insurance on their car, then both parties know exactly what the insurable interest is i.e. the car. However, this is not the case with reinsurance policies. This is […]
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In the previous article, we have read about what multi-year reinsurance contracts are. We now know what these unconventional contracts are and why they are becoming increasingly popular with the passage of time. However, we only understood the arrangement from the point of view of the ceding insurer.
It is important for us to also understand the pros and cons from the point of view of reinsurance companies. This is because reinsurance companies across the world are giving a mixed reactions. While some of them have been embracing the idea of multi-tower non-conventional reinsurance contracts, others have been trying to avoid it. This is possible because of the fact that some reinsurance companies are focusing on the pros of the arrangement whereas others are focusing on the cons.
In this article, we have a closer look at what those pros and cons are and how they impact the business of the reinsurance company.
The approach of consolidating various insurance towers into a single non-conventional contract has several benefits for the reinsurer as well. Some of the important benefits have been listed below:
The traditional financial theory believes that a diversified portfolio has a lower chance of loss. Up until now, reinsurance companies had to look for risks that were not correlated to each other in order to create a diversified portfolio. However, when it comes to multi-tower contracts, no additional actions need to be taken to ensure that the portfolio is diversified. Reinsurance companies are able to easily obtain a pre-diversified portfolio.
Most multi-tower contracts are for a period of greater than one year. This means that not only does the reinsurance company bag the sale immediately, but they are also relieved of the effort which needs to be put in while renewing the contract.
There are many reinsurance companies that are opposed to the idea of multi-tower reinsurance contracts. This is because of the following disadvantages.
Reinsurance companies find themselves pressurized to take on additional risk which is associated with product bundles. Many reinsurance providers would not accept such a high risk if it were in a single-tower contract. It is for this reason that traditional service providers generally steer clear of such non-conventional contracts.
The bottom line is that even though the reinsurance industry as a whole is moving towards multi-tower non-conventional reinsurance contracts, there are many reinsurance companies that are still averse to doing so. This is because there are many pros and cons of multi-tower contracts and each reinsurance company must make an individual decision based on its own internal decision-making parameters.
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