Choosing the right reinsurance structure: lessons from Africa Re

In the second Reinsurance Matters webinar, hosted by CN&CO on behalf of Africa Re, Reneiloe Pagiwa, senior manager of marketing and underwriting at Africa Re, tackled a question that sits at the heart of an insurer’s risk management strategy: how does an insurer determine the most appropriate reinsurance structure for its particular circumstances?

His starting point was that reinsurance should never be approached as a standard product purchase, or simply because a particular structure happens to be popular in the market. Instead, the decision should begin with the insurer’s business objectives, risk profile, capital position and stage of development.

Rene said he frequently encounters cedants and brokers requesting quotations across a range of options, from quota share to non-proportional structures, without necessarily being clear about the problem they are trying to solve.

“The first question shouldn’t be, ‘Should we buy quota share or excess of loss?’ It should be, ‘What are we trying to achieve and what risks are we trying to manage?'” he said.

This has become particularly important as the insurance operating environment grows more challenging: catastrophic and weather-related events are increasing, earnings volatility remains a concern, regulatory expectations are growing and capital continues to come under pressure, while boards still expect growth and strong financial performance. Reinsurance, Rene argued, therefore needs to be viewed as far more than a mechanism for transferring risk. Properly structured, it can support growth, capital management, profitability and resilience.

“We need to buy appropriate reinsurance structures for the right reasons,” he said.

To help insurers do that, he proposed what he calls a reinsurance decision journey, which connects strategy and objectives with risk assessment, structure and the eventual evolution of the programme.

Reinsurance needs change as the business grows

A crucial part of this decision journey is recognising that an insurer’s needs change as the business develops. Rene used the traditional business life cycle to demonstrate how reinsurance requirements evolve at each stage:

• Start-up: focused on building market share, but typically constrained by limited capital, little historical data and modest underwriting experience against ambitious growth targets. Quota share tends to work well here, since premiums and losses are shared proportionately with the reinsurer, reducing capital requirements and supporting solvency. “In the early years, you are effectively using the reinsurer’s capital to help build your own business,” Rene explained.
• Growth: the insurer wants to retain profitable smaller risks while gaining additional capacity to compete for larger commercial business. A surplus treaty tends to suit this stage, allowing the insurer to keep risks within its chosen retention while sharing larger exposures.
• Early maturity: the conversation shifts to profitability and stable earnings. The insurer can absorb ordinary losses, but unusually large individual claims can still create volatility, which is where risk excess of loss protection becomes more relevant.
• Full maturity: the concern becomes resilience and balance sheet preservation, particularly against catastrophic accumulations such as the floods experienced in KwaZulu-Natal, the Eastern Cape and the Western Cape. Catastrophe excess of loss protection can shield capital against these severe events.

“Reinsurance programmes should evolve as the insurance company grows,” Rene said. “The structure that was right for you as a start-up will not necessarily be the structure you need when you are a mature insurer with significant capital and reserves.”

Understanding the risks in the portfolio

Business objectives, Rene stressed, represent only one side of the equation. Insurers must also undertake a detailed assessment of the risks inherent in their portfolios before deciding on a structure, since different risks behave differently and require different forms of protection. Considerations include:

• Whether the portfolio experiences high-frequency losses, severe individual losses or catastrophe accumulations
• The balance between short-tail and long-tail business
• Whether the insurer is entering a new market or launching a new product

As a rule of thumb, a portfolio exposed to frequent losses may benefit from proportional protection such as quota share, while severe individual losses point towards non-proportional structures. Short-tail portfolios generally lend themselves more readily to non-proportional protection, while long-tail classes such as engineering and liability can benefit from proportional arrangements. Catastrophe accumulation calls for catastrophe excess of loss, and stop loss provides a different type of protection again, safeguarding the overall annual underwriting result rather than responding to individual claims or events, which can be particularly useful where loss development is uncertain.

“Risk analysis should precede the choice of structure,” Rene emphasised. “Do your homework first. Understand what is sitting in your portfolio and what could materially hurt the business. Only then should you decide which reinsurance tool addresses that exposure.”

This thinking extends to the choice between treaty and facultative reinsurance: treaty arrangements provide automatic protection for portfolios of relatively homogeneous risks where sufficient volume exists, while facultative arrangements allow individual consideration of unusually large, complex or uncommon exposures. In practice, mature insurers often combine structures, since no single form of reinsurance necessarily addresses every objective or exposure.

Setting the right retention

Once an insurer has selected the broad structure, another critical decision remains: how much risk should it retain? Retention is the amount an insurer keeps before reinsurance protection responds, and should reflect risk appetite, capital strength, profitability objectives and strategic ambition. Retaining too little may mean unnecessarily surrendering profitable premium to reinsurers, while retaining too much can expose the insurer to unwanted volatility and potentially threaten its capital position.

“There is always a balance to be struck,” he said. “If you give too much away, you sacrifice profitability. If you keep too much, you may create volatility that your balance sheet cannot comfortably absorb.”

Although insurers often use rules of thumb based on capital, reserves or premium income, Rene argued that the important point is that retention must be considered deliberately and in the context of the organisation’s financial position.

Questions every executive should ask

Rene encouraged executives and board members to engage more actively with their reinsurance teams, even without deep technical expertise. Useful questions include:

• What would a major catastrophe do to the company’s capital position?
• Is the retention aligned with available capital?
• What business objective does each component of the programme address?
• How would the programme respond under severe loss scenarios?

The quality of the answers, he noted, can provide significant insight into whether the programme remains fit for purpose.

Start with objectives, not products

Rene concluded with a simple principle: reinsurance should never be bought out of habit, because competitors use a particular structure, or merely to satisfy a regulatory requirement.

“Do not start with the product,” he said. “Start with your objectives, your risk assessment and your capital position. Once you understand those three things, you can choose the structure that actually solves your business challenges.”

Used in this way, reinsurance becomes an active strategic tool that can help an insurer grow sustainably, manage volatility, protect capital and build long-term resilience.

Read more about the first Reinsurance Matters webinar here.