Introduction
Reinsurance Management
1 Reinsurance management refers to the responsibility and control of reinsurance arrangements, where a portion of the risks assumed by an insurer is ceded to another insurer. This includes the cessions from direct insurers to reinsurers or other direct insurers, as well as retrocessions from reinsurers to direct insurers or other reinsurers. Insurers may purchase reinsurance to provide security and liquidity, and to increase their capacity to underwrite more business. As every insurer carries in its financial statements a significant liability to meet its obligations to policyholders and claimants, reinsurance management plays a vital role in ensuring the insurer?s ability to meet these obligations.
2 In the wake of catastrophic events in recent years and rapid changes in the global business environment, it is increasingly crucial for insurers to adopt adequate and effective reinsurance arrangements. Weaknesses in an insurer?s reinsurance arrangements may impair its liquidity or capital position, and possibly affect its ability to meet its obligations to policyholders. This, in turn, can severely erode confidence and upset stability in the financial system.
3 This Notice sets out the guiding principles that relate to the oversight of the reinsurance management process of insurers.
Guiding Principles
4 The primary responsibility for the sound and prudent management of an insurer rests with the Board of Directors and senior management. The Board of Directors and senior management should develop, implement and maintain a Reinsurance Management Strategy appropriate to the operations of the insurer to ensure that the insurer has sufficient capacity to meet obligations as they fall due.
Role of the Board of Directors
5 Every insurer should have a Reinsurance Management Strategy appropriate to the company?s overall risk profile. This should be approved by the Board of Directors
6 The Reinsurance Management Strategy will form part of the insurer?s overall underwriting strategy and risk management philosophy and should be properly documented. The Strategy should identify the insurer?s reinsurance management systems, in particular, its policies and procedures for selecting and monitoring reinsurance programmes as well as management responsibilities and controls. It should lay down clear methodologies for determining all aspects of the insurer?s reinsurance arrangements, including but not limited to:
(i) identification of the insurer?s tolerance to risk;
(ii) identification of the risk retention levels appropriate to the insurer?s tolerance to risk;
(iii) determination of the types of reinsurance arrangements most appropriate to manage the insurer?s risk exposure in relation to its risk tolerance;
(iv) selection of the panel of reinsurers used, including consideration of diversification and creditworthiness of the reinsurers;
(v) management of any known concentration risks with respect to a particular industry, geographical region, product type, and/or single cedant in the insurer?s underwriting books;
(vi) the process for monitoring, reviewing and updating the reinsurance strategy in response to changes in the market and the insurer?s risk profile;
(vii) monitoring the collectibility and timely receipt of its reinsurance recoverables; and
(viii) management of liquidity risks in the event of a timing mismatch between the payment of claims and the receipt of reinsurance recoverables.
7 The Board of Directors should review the Reinsurance Management Strategy at least once a year, or when there are material changes to the insurer?s circumstances, its underwriting policy or the status of its panel of reinsurers.
Role of Senior Management
8 Senior management should define and document clear operational policies and procedures for implementing the Reinsurance Management Strategy approved by the Board of Directors.
9 To avoid any gaps in the reinsurance arrangements in the form of uncovered risks, senior management should ensure that the terms and conditions stipulated in the reinsurance arrangements are compatible or in line with those of the underlying business.
10 Adequate internal control systems should be in place to ensure that all business activities are carried out with the Reinsurance Management Strategy in mind and that the planned reinsurance cover is in place.
11 Senior management should ensure proper and effective reporting systems are in place, which satisfy all requirements of the Board with respect to reporting frequency, level of detail and recommendations for change.
Reference Checklist
12 All insurers should refer to the checklist at Appendix A (PDF, 7.42KB) for internal use and reference.
