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Popularity of reinsurance modelling increases


September 19, 2006   by Canadian Underwriter


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Companies attempting to optimize their reinsurance programs are turning to reinsurance modeling more and more, A.M. Best reports.
The ratings agency notes Raju Bohra, a senior vice president at Willis Re Inc., made the observation at the 111th National Association of Mutual Insurance Companies convention in Tampa, Florida.
A.M. Best reports Bohra as saying that “reinsurance optimization simulation” the modeling of reinsurance needs and risk exposures is very much like catastrophe modeling. And it has grown in popularity over the past five to seven years.
“Part of it is driven by higher demand for reinsurance following Hurricane Katrina,” A.M. Best notes, citing an interview with Bohra. “Part of it is the increased interest in risk management. And part of it is the increased complexity of selecting a reinsurance program for a company’s book of business, catastrophe or otherwise.”
Bohra noted the reinsurance decision “is really getting elevated in a lot of companies. It’s now a CFO decision with a lot of financial impacts to be considered.”
Reinsurance modeling, which helps a company create a customized reinsurance program while understanding the benefits and risks, has “become almost a basic way of looking at reinsurance,” he said. “Brokers are providing it. Reinsurers are providing it. Clients are expecting it.
“Ultimately, you want to get the greatest economic gain for your company without significant downside risk,” Bohra said. “Simulation allows us to go across a whole range of options.”
In the past, insurers relied on old criteria what their competition was doing, rules of thumb and cost concerns to buy their reinsurance, Bohra said. He observed some companies have bought less reinsurance in order to save money.
“A lot of companies look at reinsurance as an expense,” Bohra said. “It’s not just an expense it’s a risk-management tool. You don’t just not buy auto insurance in order to save money, do you?”
Reinsurance modeling allows companies to understand and quantify their risk and the benefits of reinsurance, he said.


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