FOR years, the insurance industry has faced various headwinds, most of them linked to economic performance given that the two are intertwined.
However, some of the challenges have been sector-specific, for example, the externalization of risk, which has turned out to be a continental challenge.As an establishment meant to minimize the adverse consequences of unforeseen misfortunes, insurance firms are risk outcome underwriters.
Just like with any other sector, the insurance industry has some core principles to abide by, for example, co-insurance.Co-insurance is a practice in which multiple insurance companies participate in covering the same risk and insurers may opt for co-insurance for various reasons, depending on the magnitude and complexity of the risk.However, a concerning trend is emerging where insurers deviate from standard practices and limits and selectively pick risks for co-insurance, leading to facultative inward practices and anti-selection, posing a threat to reinsurers.Facultative inwards practices involve insurers exchanging facultative business among themselves instead of seeking reinsurance.While co-insurance and facultative principles help spread risk, reinsurance offers benefits beyond risk spreading.But anti-selection of risks has become a significant challenge faced by reinsurance companies.It is a phenomenon in which individuals with a higher probability of making a claim are more likely to purchase insurance, which can lead to an adverse selection problem.This can result in insurers having a disproportionate number of high-risk policyholders, leading to higher claims payouts and potentially higher premiums for all policyholders.As these trends unfold, insurance sources this week told this publication that the risks are through co-insurance, where insurance companies are taking good risks, and not passing them to the reinsurers.This translates to anti-selection by insurers to the reinsurance companies.“What they are now passing are bad risks, reducing the amount of good and profitable risks being passed to the reinsurers," the source said."Co-insurance, therefore, becomes a threat because insurers are creating a new line that can compete directly with the reinsurer. Where reinsurers ideally compete on their own, they now have competition with insurers themselves."The source added that this is quite rampant, especially with risks they feel are good, creating a portfolio of bad risks in the reinsurance pool.“The principle of reinsurance is the pooling of risks of good and bad nrisks so that the good risks can balance the bad risks and make it a profitable business."But if you only have bad risks, you do not have any buffers in your pool with chances of serious losses becoming very high,” the source said.However, Actuarial Society of Zimbabwe president-elect Prosper Matiashe said the ideal reinsurance strategy would target to retain as many profitable lines of business as possible and seek capital cover for volatile or challenging lines of business from reinsurers.He added that reinsurers should be able to mitigate accordingly based on building competencies that lock in business and building superiority in risk management."Therefore, the practice of retaining profitable business is acceptable. What is not acceptable is to select specific profitable lives or risks within the reinsured line of business or portfolio," he said."However, reinsurers must be able to price the risks presented to them. If they are bad risks, pricing should be loaded accordingly or even decline the business."Matiashe added that while reinsurers have unique competencies that they bring to the table and have an important role in the future despite the presence of coinsurance and any adverse risk selection by insurers, the key to their success was to be leaders in providing products that insurers don’t have capabilities in and require capital and expertise in those products. “That has always been the purpose of reinsurers, and those that can deliver the mandate will be successful,” he said.Under normal circumstances, coinsurance should not necessarily threaten the reinsurance business, given that reinsurers provide risk transfer support that another insurer may be unable to provide.Reinsurance strategy is based on risk profile, profitability targets, balance sheet strength, and expertise.Insurance Institute of Zimbabwe president Tatenda Katoma said there will always be competition amongst insurance companies and reinsurersHe said the need to keep certain information from competitors will sustain reinsurance.Katoma said reinsurers have always managed this risk by setting the capacities and deductibles at the right levels, whether retention limits or treaty capacities.“Anti-selection or adverse selection is a risk that reinsurers face when taking up business from insurers. However, reinsurers have always managed this risk by setting the capacities and/or deductibles at the right levels, whether retention limits or treaty capacities," he said."This provides automatic thresholds on what can be retained by the cedant or ceded to the reinsurers. With respect to facultative business reinsurers, they have used the following to underwrite and price any bad risks. Underwriting and risk assessment processes to evaluate the risks being ceded by the ceding insurer."This includes conducting thorough risk assessments, reviewing policy terms and conditions, and analysing the claims history. By carefully assessing the risks, reinsurers can identify potential anti-selection and price their reinsurance premiums accordingly."Concerning pricing and risk sharing, he stressed that increasing premium rates or requiring the ceding insurer to retain a larger portion of the risk on suspected bad portfolios has been one way to price bad risks.Katoma said this helps ensure that the reinsurer is adequately compensated for the potential losses associated with high-risk policies.Reinsurance, according to Katoma, allows insurers to access reinsurance markets worldwide, enabling them to underwrite risks in different regions and take advantage of growth opportunities in emerging markets.Should reinsurers leverage on global reach, experts argue that this can be particularly beneficial for insurers operating in a specific geographic area or niche market where local coinsurance options may be limited.
