Whether your company is located in London or New York, Brighton or Boston the challenge of maximising the economic value of your reinsurance assets grows more difficult each day. Long gone are the days when collecting reinsurance was an “accounting function”, and the primary responsibility was to bill and patiently wait to apply the cash once it was received. Today a much more proactive and comprehensive strategy must be developed that incorporates and considers a combination of efforts in the areas of collections, arbitration and commutation. Each of these activities can be viewed along a continuum that will have a direct relationship to the economic value of the reinsurance asset. A few simple proactive steps can be implemented to help better achieve this overall goal.

The collections efforts must be driven by a focused dedicated staff whose sole function is collections. Given the breadth of the issues at hand in today’s environment it is necessary that a multi disciplined group be created that includes expertise in the area of underwriting, claims and accounting. In addition, these professionals must have the ability to go on the road and meet with reinsurers face-to-face. Meetings of this type will pay far greater dividends than the other forms of dialogue which many times results in trading tersely worded emails and addressing lengthy letters. Payments trends and cash flow must be closely monitored. Any unexplained slow up in payment may be the precursor of cash flow issues or weakened financial position. Finally, the simplest but most often forgotten tactic in and effort to maximise cash collections is whenever the opportunity arises always ask for the money. It is also necessary to acknowledge that various situations will arise where alternatives to pure collections and recovery efforts should be focused on either through arbitration or commutation.

Organisations need to be willing to arbitrate when appropriate. Ceding companies tend to fall into two camps. The first are the saber rattlers who continual threaten arbitration, but never file; and the second group will file on any claim of any size once the balance is considered overdue. Neither of these strategies lends itself to maximising the economic value of the reinsurance asset. The dollar value of the claim and the specific issue in dispute should determine whether to arbitrate or not. For each specific case it is necessary to measure expected legal costs to be incurred, impact on internal resources, and duration of the arbitration process, against the potential collection value.

Commutation targets are the at risk companies and whenever possible it is extremely important to be the first in line to approach these companies. Being proactive and moving to the head of the line can only be achieved by constantly monitoring the financial condition of your reinsurers. Although most companies are very concerned about measuring and understanding the financial strength of a reinsurer when they are first added as a “new security” this type of financial scrutiny and in many cases does not continue going forward. Publicly available information such as annual statement and quarterly reporting are excellent sources of information that highlight potential future financial weaknesses. Targeted companies should be prioritised based on the highest potential exposure and lowest financial strength rating. The objective in commuting is to do the deal before the company becomes front page news in the insurance trade journals. A proactive focused group that combines and coordinates the actives of collections, arbitration and commutation will realise the ultimate goal of maximising the economic value of your reinsurance asset.

This Feature item appeared in issue 106 of JTW News - June 2006

Author: Rik Grant - Affiliated Alan Gray Companies