Looking after their own.

Insurers are increasingly turning to group retention vehicles in an attempt to retain their most profitable business. Adrian Leonard reports.

Captives are conventionally considered a tool for insureds, but
insurers are increasingly using their own de facto reinsurance captives,
styled as group retention vehicles, to retain premium income and maximise

The practice is not new, but as insurers get bigger so do their appetites
for retention and therefore their captive reinsurers gain importance.

Global leaders are letting less business slip off their balance sheets and
ensuring that the more profitable cessions stay in the group. "The
difficult issue we all face is balancing the demands of individual
business units with those of the group as a whole," says Robert Stevenson,
chief group reinsurance officer at Zurich Financial Services (ZFS). "We
view internal reinsurance as a key component of our financial management

More than risk transfer

Increasingly, insurers with the ability to bear significant retentions -
ZFS's appetite is about SFr 50m ($32m) - are using internal reinsurance as
a financial management tool, rather than a simple risk transfer

Mr Stevenson says recognising the difference is a critical step.

Using reinsurance for financial management often means ceding premium to
captive reinsurers in financially appealing domiciles; Bermuda and Dublin
are favourites. "Our primary consideration is to enhance the value of ZFS
by providing what we believe to be a superior financial management
vehicle. We have multiple group balance sheets and we use whichever one we
deem appropriate," Mr Stevenson explains, adding that most internal
reinsurance is channelled to "balance sheets" in Switzerland or

ZFS's corporate risk management unit is responsible for setting prudent
minimum and maximum retentions at both the business unit and group level,
based on the capital of each. "We price the exposures, using the skill and
knowledge of Zurich Re and its actuarial staff, to provide equitable
pricing to our business units," he says.

Reinsurers will see a "logical consolidation" of ZFS' outwards
reinsurance, says Mr Stevenson. "In property catastrophe we currently have
20 plus programmes with external placements. We feel very strongly that is
not an economic solution, and we will consolidate those into a single
catastrophe platform for the year 2000."

CGU also uses a Bermuda-based vehicle. "If subsidiary business units are
profit-accountable, as they are at CGU, they need to buy optimal
reinsurance based on their financial circumstances," says Nicholas
Michaelides, director of group reinsurance.

"That leads to a collection of reinsurance programmes that may be
sub-optimal for the group. One use of a captive reinsurer is to
participate in these programmes by taking a share of them. You benefit
from the scale of the group, and from risk diversification." Echoing Mr
Stevenson, he says the goal is to deliver capital efficiency.

CGU's Curepool

CGU's Bermuda-based reinsurance captive, Curepool, takes a share of most
business units' reinsurance programmes, which are priced at market

The managers of individual business units are responsible for ensuring
that they deliver a reasonably balanced portfolio of risk, but it is up to
head office, led by an internal reinsurance manager, to decide what is a
sensible share - in the group's interest - to cede to Curepool.

"We won't tell them how to manage their markets, but we will tell them
what share the captive will take," says Mr Michaelides. In some cases
Curepool may take a large share of particularly attractive reinsurance

Mr Michaelides says Curepool will vary its share based on market
conditions, but that it will not change dramatically from year to year. In
1998 the combined writings of the pre-merger General Accident and
Commercial Union reinsurance vehicles was about £70m ($112m), and in 1999
Curepool wrote a similar amount of business.

"We can only see growth as we better understand our risk profile, as the
company continues to grow and as Curepool continues to assist business
units in their management as a profit centre," says Mr Michaelides. At
present, he reveals, CGU has a new framework for its internal reinsurance
programme, and it is working out the details and practicalities through a
pilot project with a single business unit.

CASE STUDY 1 - Tokio Marine

- Tokio Marine (Ireland) (TMI), a subsidiary of Tokio Marine & Fire, was
"a pure group retention centre" before it was relaunched this year as
open-market reinsurer Tokio Marine Global Re, says chief executive Takashi
Oka. "We thought it was much better to retain profitable business within
the group than to cede it outside."

- In 1998, TMI wrote group reinsurance of approximately Y5bn ($49m), which
Mr Oka says is "a bit less than 10%" of the group's cessions. Premiums are
ceded from head office and directly from subsidiaries around the

- Unlike the methodical approach of some insurance groups, Tokio Marine
does not force its reinsurer on subsidiaries. "It does protect some group
companies for catastrophe, but not on a uniform or standard basis yet," Mr
Oka says. "Because we have so many subsidiaries overseas, and the size and
the needs of the companies are different, I don't think we can do it on a
uniform basis." - All subsidiaries are aware of the group retention
vehicle and its purpose of retaining profitable business. "It is up to
them to propose business to us," Mr Oka explains. "We then study the
business to see what we will accept and how. It goes through the filter of
the international department in Tokyo and the final decisions are made in

CASE STUDY 2 - Allianz

- Allianz AG, the holding company of Allianz Group, is the European
giant's sole internal reinsurer, but it too has opened a Dublin vehicle
whose primary role will be to accept internal cessions.

- The group has a decentralised approach, says Herbert Sedlmair,
vice-president of Allianz AG's reinsurance department, and reinsurance
decisions will be made where original business is accepted.

- Allianz uses two very liberal rules when accessing the business, Mr
Sedlmair explains. "First is full transparency, so we know from every
business unit what is placed where, and what business is available to the
outside reinsurance world. Second, we get a preferred partnership: we
would like the first call on their business."

- Ceding Allianz companies obtain an open-market benchmark for

Allianz Re Dublin or existing reinsurance units - including Luxembourg,
Switzerland and Singapore - participate in the programme but will not
assume entire internal treaties.

- In 1998, Allianz companies ceded internally gross premiums of nearly DM
10bn ($5bn). Mr Sedlmair says the premium will not be transferred to
Allianz Re Dublin, but that the new operation will seek additional
internal business. "Allianz Re Dublin will use its advantages to
complement the range of products offered to Allianz Group companies."

- Like Tokio Marine Dublin (see Case study 1), Allianz is destined to
become an open-market reinsurer. "In the start-up phase, Allianz Re Dublin
will write the business we know, group business that we believe in. After
that we will have a sound basis to look beyond Allianz's boundaries," he
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