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Insurance companies currently face increasing property and casualty risks on several fronts. Climate, cyber and technology, and social and demographic changes have all impacted the way insurers quantify risk. These factors also affect the desire to close the protection gap and transfer risk through catastrophe bonds (cat bonds) and collateralized reinsurance. As a result, trustees can play an essential role in helping to assure the safety of transactions.

Key Takeaways

  • Collateralized reinsurance is a significant and growing mechanism for risk transfer given the safety and controls offered by a trustee.
  • Risks like climate change and cyber threats make reinsurance more vital than ever for stability.
  • Each deal has its unique maze of stakeholders, regulations, and timelines.
  • The role of a trustee in managing collateral can be the game-changer in closing deals swiftly.
  • Seasoned trustees can maximize the use of collateral, spot potential pitfalls, assist with regulatory compliance, and accelerate the final steps of a transaction.

The Trends Behind a Growing Reinsurance Market

Collateralized reinsurance has seen significant growth in the risk transfer market. It has grown substantially in recent years, equaling and even slightly outpacing cat bonds in total issuance. Moreover, the reinsurance market is forecast to increase by $358.03 billion from 2022 to 2027 (i.e., at a CAGR of 10.26%).1

In a world of increasing risk, this growth is entirely plausible. We are certainly seeing more activity and interest among clients. Reinsurance helps insurers manage risk, increase their capacity for underwriting and innovation, and stabilize profits. It also enhances an insurer's financial solvency. As a result, it plays a critical role in maintaining the stability and efficiency of the insurance industry.

Finally, price and rate increases in the insurance market offer compelling investor opportunities. In parallel, insurers seek opportunities to create new products that cover novel risks such as cyber breaches, cryptocurrency, or unusual weather events.

Handling Complexity with Speed

Reinsurance transactions involve numerous stakeholders and participants. They require thorough due diligence, negotiation, legal documentation, and financial arrangements. Both the insurer and reinsurer must meet regulatory, contractual, and financial obligations.

The turnaround time for completing a deal depends on the complexity of the risks involved, the type of reinsurance (treaty or facultative), and potential regulatory requirements. Simpler facultative reinsurance contracts, which cover individual risks, might take as little as a few weeks. Treaty reinsurance, which involves covering a portfolio of risks, is typically more complex and may take several months to negotiate and finalize.

A rapidly growing market puts the efficiency, experience, and capacity of all parties to the test. In our trustee role, we find that parties to a deal engage a trustee to manage collateral towards the end of the process. Trustees are legally obligated to act in the best interests of both parties, adding a layer of assurance to the transaction as it is finalized.

Taking the Final Steps Steadily

As a reinsurance transaction approaches its final stage, a nimble trustee can make all the difference in the safety of the deal and its underlying collateral. Involving a trustee earlier in the process can help ramp up quickly to address all required terms and conditions (e.g., payment of fees and interest, and holding, managing, and disbursing collateral promptly).

In addition, trustees who have supported many transactions over the years have accumulated a lot of wisdom around how to maximize the use of the collateral during the tenure of an agreement. They can keep ahead of regulatory compliance, record-keeping and reporting, and dispute resolution. They can also spot likely issues, asset safety concerns, or other risks before they arise. By doing so, they help avoid problems that require rethinking and late-stage negotiation. They can also accelerate processes such as account openings, vetting counterparties, and completing Know Your Customer (KYC) validation.

What to Consider

As risks mount, new opportunities emerge, and the insurance landscape continues to evolve. The role of collateral trustees in reinsurance transactions has become ever more crucial. Their knowledge not only streamlines the transaction process but also fortifies risk management.

By involving a knowledgeable and agile trustee earlier in the reinsurance deal cycle, insurers and reinsurers can more efficiently use collateral and help mitigate risks around collateral, regulatory compliance, and financial obligations. In the face of rapid collateralized reinsurance growth, nimble trustees play a crucial part in robust, efficient, and timely risk transfers.

Wilmington Trust's highly skilled Insurance Collateral Trust team draws on thinking and solutions gained from years of experience to deliver a solid understanding of the business behind the need for these trusts - and view their role as one of advocate for all parties involved.

Contact our Insurance Collateral Trust team to execute your deal efficiently and with custom solutions.

[1] Aon Securities, LLC https://www.prnewswire.com/news-releases/reinsurance-market-size-to-grow-by-usd-358-03-billion-from-2022-to-2027-increasing-awareness-of-insurance-products-boosts-market---technavio-301884187.html

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This article is for educational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.

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