Firms’ reinsurance reviewed by GFSC

Reinsurance is insurance of insurance companies, with risk spread to mitigate the impact of potential major claims, and the GFSC took a look at its use locally in a thematic review. The review also sought to check industry’s adherence to a guidance note on reinsurance and other forms of risk transfer issued in 2018.

The guidance note set out the commission’s expectation that licensed insurers will effectively manage their use of reinsurance and other forms of risk transfer as part of the risk management framework. A failure in this framework may result in a firm being unable to pay claims to its policyholders, warned the commission.

‘Reinsurance plays an important role within the insurance industry in Guernsey,’ said the GFSC in its findings. ‘A well-structured reinsurance programme brings many benefits, but conversely it has the potential to cause significant harm to insurers and their policyholders if implemented poorly.

‘The thematic identified a number of good practices within industry. Some firms assess themselves regularly against the guidance note, have well-thought-out reinsurance strategies, comprehensive and detailed policies and procedures and high- quality reinsurance contracts. There were, however, examples of poor practice.’

These included that a majority of firms assessed themselves against the guidance note when it was first published but had not done so since, while a ‘significant’ number had never assessed their reinsurance framework against the guidance note.

A number of firms had reinsurance contracts missing clauses that would reasonably be expected to be in the agreements, while a number utilised unrated reinsurers with little or no consideration of the potential risks from using them and the mitigants required.

The GFSC said that several firms accepted the reinsurers proposed by brokers without making appropriate, risk-based independent checks on their creditworthiness.

Several firms had ‘inadequate’ policies, procedures and controls appropriate for the size, nature and complexity of their business, while few considered the liquidity risk of their reinsurance framework.

A ‘small number’ of firms had reinsurance contracts that remained unsigned for long periods after cover incepted.

One firm had policies and procedures but did not follow them and did not document why it had not followed them, said the GFSC. In this instance the firm had adopted a strategy that exposed it to significant risk, which it may not have done had it followed its own policies and procedures.

‘Whilst noting the good practice within industry, the commission is concerned by the number of firms who are not following the guidance note, potentially creating unnecessary risk for their policyholders and the viability of their business/professional reputation.’

The thematic review was undertaken during the latter part of 2021, looking at a cross-section of the insurance industry in Guernsey.

A GFSC spokesman said: ‘The commission is following up the findings of the thematic with individual firms where appropriate and the overall conclusions will be incorporated into the routine development of our supervisory processes.’