June 5, 2009
SIX FACTS YOU NEED TO KNOW WHEN BUYING REINSURANCE FOR A RISK RETENTION GROUP
By Paul Dzielinski
Senior Vice President – U.S. RE Corporation
If you are thinking of buying reinsurance for a risk retention group (RRG), here are six facts that will help you understand the process and obtain the most favorable terms and conditions.
Fact One:
Reinsurance can provide your RRG with additional capacity
Most RRG’s commence business with a small capital base, and grow their capital through retained earnings and share purchases by member insureds. Even with these sources of capital, there can be severe strains on the capital and surplus of a new RRG, because of the rules for statutory accounting.
Fact Two:
Reinsurance can protect your RRG from catastrophic losses.
The Federal Risk Retention Act doesn’t mandate that RRG’s buy reinsurance. But many state insurance departments do. The reason is the potential for paying out large claims. If your RRG writes $1,000,000 policy limits, a loss of this size could represent a substantial loss of surplus, potentially putting the RRG into financial problems.
Fact Three:
Reinsurance can be an effective sales tool with potential insured members.
One advantage to buying reinsurance is that you can demonstrate to potential insured members that there is substantial financial backing behind the policies issued by the RRG. This can give them the peace of mind knowing that their claims should be paid.
Fact Four:
Use reinsurers with strong financial backing.
You could pay a substantial premium for your reinsurance. You want to make sure that your reinsurers will be there for you when you have claims. Always make sure that your buy reinsurance from companies that have high financial and claims-paying ratings from rating agencies such as A.M. Best and S&P.
Fact Five:
You need a high quality reinsurance submission.
Reinsurers have become more discriminating about the clients to whom they will sell reinsurance. You need to stand out from the crowd. The best way to do this is by preparing a high quality underwriting submission. It will show the reinsurers that you are serious about your business; that you are knowledgeable about the risk you are underwriting; and that you can provide them with the data they need to get comfortable taking your risk.
Fact Six:
Use an Expert Advisor
To make sure you get the best terms and the smoothest execution, you need to enlist the services of professionals. The reinsurance brokers at U.S. RE can help you prepare your submission, identify quality reinsurers, and negotiate the best terms. In the last year, US RE has successfully placed reinsurance for a number of risk retention groups in all industry sectors. They can guide you through the reinsurance buying process.
For free, confidential, no obligation advice on how your risk retention group can successfully buy reinsurance contact: Paul Dzielinski, Vice President (pdzielinski@usre.com); or Larry Shatoff, Senior Vice President (lshatoff@usre.com).
