LAM10040 - Reinsurance: The commercial rationale for reinsurance

Reinsurance is an important risk management tool for insurers enabling reduction of risk and may be driven by a number of commercial factors such as:

• reducing exposure to specific risks
• to increase capital available to write new business
• to access expertise in the reinsurer
• the price of reinsurance may be attractive as reinsurers may have lower capital requirements for the same business due to their scale and spread of risks
• reinsurance in advance of a transfer of business, explained below

This is not an exhaustive list of drivers but indicates some that may apply.

An insurance business transfer scheme under Part VII of the Financial Services and Markets Act 2000 (FSMA) enables an insurer to transfer policies at a specific time and date to another insurer without the need to obtain the permission of individual policyholders. Court approval is required and that can take time, typically 12-15 months, as policyholders need to be notified and substantial actuarial input is required particularly in the case of life businesses.

Therefore, where an insurance business is acquired from a third party, it is quite common for the economic benefit of the business to be immediately transferred to the ultimate recipient by means of a reinsurance contract. The reinsurance is then collapsed when the court approved transfer occurs. This can also occur where an insurance company is acquired from a third party and the business is then transferred across to another group insurer. The taxation of Part VII transfers is dealt with in LAM13000.