Reinsurance for start up or small risk retention groups is essential for long term success. The reinsurance buying process can be confusing for inexperienced buyers. Which structure to use? What coverage limitations will I have? How do I know I’m getting good value for my money?
When it is time for you to buy reinsurance, here are six tips to help you understand the process and avoid expensive mistakes.
1. Reinsurance provides capacity. Most risk retention groups start with a small capital base and grow through retained earnings and share purchases by their members. Even with these sources of capital there can be severe strains on the capital and surplus of a new company due to statutory accounting rules. Buying quota share reinsurance reduces your premium to surplus leverage.
2. Reinsurance protects your company from catastrophic losses. Small insurers are exposed to the threat of catastrophic severity losses. These losses, while rare, can substantially deplete your capital. Excess of loss reinsurance transfers the volatility of catastrophic losses from your company to your reinsurers.
3. Reinsurance can be an effective sales tool with potential customers. Most risk retention groups do not have a financial strength rating which sometimes makes customers hesitant to buy insurance from you. Backstopping your company with reinsurance can alleviate this concern, and give your customers peace of mind.
4. Buy from reinsurers with strong balance sheets. You will pay a substantial premium for your reinsurance. You want to make sure that your reinsurers will be there when the time comes to pay claims. Always do business with reinsurers that have high financial and claims-paying ratings from A.M. Best and Standard & Poor’s.
5. Put together a high quality reinsurance application. Reinsurers have become more discriminating in who they will reinsure. Their underwriting process requires substantial analytical and actuarial analysis. Reinsurance buyers need to put their best foot forward by preparing a data-filled professional application. It shows reinsurance underwriters that you are serious about your business; that you are knowledgeable about the risks you underwrite; and that you can provide them with the data they need in order to properly evaluate the risk.
6. Use an expert adviser. You need high quality service providers such as lawyers, accountants and actuaries to help you successfully run your business. Reinsurance brokers provide you with the same professional advice and counsel when it comes to buying reinsurance. An experienced reinsurance broker finds the right reinsurers for your business, helps prepare your application, and negotiates with reinsurers on your behalf.
Bonus Tip: What To Do Next To Buy Reinsurance The Right Way
To buy reinsurance the right way, you need the help of an adviser who has the experience and analytic expertise to get you the best reinsurance you can buy.