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Financing Life Reinsurance

Introduction
The Hannover Life Re Advantage
Financing Reinsurance
Block Assumption Transactions (BATs)
Surplus Relief Reinsurance
New Business Financing

Introduction

Hannover Life Re has considerable experience in transacting all forms of financial reinsurance in the life and health sector. We are the leading global financing reinsurer and, in our role as "stochastic banker", provide solutions that are tailored to our clients' needs.

The Hannover Life Re Advantage

Because of our experience in completing all types of financial reinsurance transaction, Hannover Life Re is well placed to work with many different types of clients to achieve the desired financial effect. Our international presence also enables us to complete transactions in different parts of the world quickly and easily. As we specialise in these types of transactions, we have dedicated teams who can work closely with clients to complete deals within the required timeframes.

Financing Reinsurance

The dividing line between traditional and financing reinsurance is not always clear. Many reinsurance treaties are designed to achieve both risk transfer and financial effects. However, where the motivation for the treaty is primarily to achieve a financial effect, it is best classified as a financial reinsurance transaction.

Hannover Life Re can work with clients to provide financing in respect of new or existing business. Some of the ways in which this can be done are described below.

Block Assumption Transactions (BATs)

Hannover Life Re specialises in BATs. A BAT involves the complete transfer of a block of business from a primary insurer to the reinsurer. It can best be thought of as the outright sale of the block in question. The reinsurer pays the insurer an amount based on the present value of future profits (PVFP) expected to emerge from the block.

There are many reasons why an insurer may wish to complete a BAT. It may have made a strategic decision to exit a particular business segment; it may be seeking to convert an illiquid asset (the PVFP in the block) to a liquid one (cash); or it may be seeking to take tactical advantage of a particular situation, for example, if it has an accumulated tax loss that it must use immediately or lose forever.

Hannover Life Re can work with clients in any given situation to help them realise the value inherent in their business. Because we specialise in this type of transaction, we can usually complete such deals quickly, achieving the maximum advantage to the client as quickly as possible.

Surplus Relief Reinsurance

Because of the stringent regulatory regimes in many jurisdictions, many primary insurers find themselves in a position where their statutory solvency level is under threat. Hannover Life Re can work with client companies in this situation to provide the amount of financing necessary to increase the solvency to the desired level.

Depending on the needs of a particular client, this financing can be provided on either a cash or a non-cash basis. Cash financing arrangements involve the reinsurer providing the insurer with an asset (cash); non-cash financing instead involves the reinsurer assuming responsibility for a liability.

In either case, the net solvency position of the insurer is improved. This arrangement works because the repayment of the financing is contingent on the emergence of future profits from an identified block of business. The insurer pays the reinsurer a fee corresponding to the amount of statutory solvency relief provided in this way.

New Business Financing

Many reinsurance arrangements are constructed on an original terms basis, with premiums and claims split between the primary insurer and reinsurer in suitable proportions, and the reinsurer paying a ceding commission to the insurer. As life insurers usually incur considerable capital costs in writing new business, the financing provided by the reinsurer can help to reduce the impact of this on the capital base.

This type of arrangement can be very beneficial to the primary insurer, as it allows a much greater volume of business to be written. The ceding commission paid by the reinsurer is recouped from profit loadings in the premium over the life of the business.