Recently, many large insurance groups have ramped up their use of internal reinsurance vehicles (mixers) to achieve better diversification benefits among subsidiaries, improve capital position at both the local and consolidated group level, promote better capital fungibility and centralise reinsurance strategy.
This newsletter dives into the rationales of using mixers, the solvency benefits, and different options available to insurance groups in structuring these mixers. We, at Gallagher Re, are experienced in advising our clients in setting up, operationalising, and optimising the use of mixers, and we recently supported medium-sized and large European insurers in setting up their mixer, with multiple billions of reserves ceded.
Introduction to Internal Reinsurance
As Solvency II and other risk-based capital frameworks incentivises diversification among risks and different entities, a centralised mixer is considered an effective approach to increase diversification, improve capital fungibility and cash transferability across an insurance group.
Different Corporate Structures for Internal Reinsurance
Solvency II Benefits of Internal Reinsurance (1/2)
Internal reinsurance impact the Solvency II KPIs at different level: The ‘ceding company’, the internal ‘reinsurance company’ but also to some extent the group insurance. The simplified impact table below described the different impacts.
Solvency II Benefits of Internal Reinsurance (2/2)
The RM reduction within subsidiaries would outweigh the RM increase within the mixer, driven by improved diversification (see illustration below, assuming RM = 25% of diversified SCR).
- SCR is transferred from subsidiaries to the mixer, so will lower the SCR at the subsidiary level.
- If Method I of group consolidation (as defined in the Solvency II level 2 text, group SCR is based on consolidated group level risk exposures for each sub-module) is used, no material change is expected for group SCR.
- If Method II of group consolidation (as defined in the Solvency II level 2 text, group SCR is the sum of subsidiary SCRs) is used to derive group SCR, consolidated SCR is expected to reduce.
A Few Examples of Internal Reinsurance (Public Information)
Gallagher Re Service Offering
- Support in the set-up of the reinsurance captive from jurisdiction choice, business plan to impact studies
- We structure and provide third party pricing for all internal reinsurance agreements (arm’s length pricing — key for tax authorities)
- We support legal and accounting reporting
Authors
Ree Chen, Executive Director, International Life & Health Practice
Etienne Busson, Executive Director, International Life & Health Practice Group
For more information, please call us on: +44 20 7170 3234
