Multi-year structured solution: Building a sustainable risk transfer program

Background 

Our customer in Asia is a leading electronics corporation with a global manufacturing footprint. Given their corporate structure with multiple local entities, they have a global property insurance program. Relative to the group's combined financial strength, this global insurance program has relatively low insurance deductible for individual local business entities. This meant that it is not unexpected to see smaller but frequent insurance losses. However, this gives rise to volatility in underwriting results for insurers, leading to sharply increasing premium rates in recent years.

Our Innovative Risk Solution  

Based on the insured's historical claims profile, we developed a structured primary layer with a multi-year risk financing component. The goal of the structure is primarily to reduce the volatility of underwriting results for the program that can be attached in excess of our primary. This way, the insured can access sufficient capacity at stable costs. 

Secondly, while there is volatility on an annual basis, the claims profile is more predictable over a multi-year period. This improved predictability means the customer has more confidence to determine how much risk they want to pre-finance over a 3-to-5 year term, while transferring the risk of claims exceeding this risk finance portion. The result is a fixed cost of risk for the most volatile part of their program, providing budget certainty and committed risk capacity over the period. Hence, with a multi-year solution, customers can build a sustainable risk transfer program.

How else can this be applied?  

While such solutions are most common for clients with captives, this is not a limiting factor. Such structured solutions are efficient tools to manage the inherent volatility arising from higher claims activity in the lower layers of large portfolios of assets or risk exposures. The multi-year risk-financing approach can also be used to indirectly build a claims reserve for difficult-to-insure risks, spreading the cost over time rather than incurring a one-off significant negative impact to a company’s bottom-line.

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