Risk management, reinsurance and capital allocation
Risk framework
Risk appetite statements, a risk register, the ORSA, and stress and scenario testing calibrated to health-specific events: pandemic (morbidity and mortality, plus lapse and NHS disruption), a medical inflation spike, provider failure, claims-handling backlog, and model error. Emerging risks matter for SA1 - antimicrobial resistance, expensive new therapies, genetic data and regulatory change.
Reinsurance as a capital tool
- Quota share: proportional premium and claims, with reinsurance commission; useful for new business strain and growth.
- Surplus: cedes large sums assured, suited to CI and group life.
- Per-policy excess of loss: caps individual severity for IP and CI.
- Aggregate stop-loss: protects the total claim ratio; the main tool for PMI and group IP.
- Catastrophe excess of loss: tail events such as a mass accident.
Cost must be judged against capital relief, not only expected recoveries.
Worked example
Expected claims £100m. The insurer retains £110m and buys cover from £110m to £150m for £8m. Expected recoveries are £3m, so expected net cost is £5m. The SCR falls from £90m to £60m, freeing £30m; at an 8% cost of capital that is worth £2.4m a year. On capital grounds alone the treaty destroys value, so it must be justified by earnings volatility, risk appetite or growth - say so explicitly.
Traps
Treating reinsurance as free capital; ignoring counterparty credit risk and collateral; forgetting that aggregate stop-loss leaves per-claim severity risk; summing standalone SCRs and ignoring diversification; ignoring recapture terms and the risk that reinsurance pricing hardens.