< PreviousCHAPTER 4: HEALTH 38 For commercial products overall, premiums had grown substantially over the past GHFDGHZKLOHHQUROOPHQWWUHQGVKDYHÀXFWXDWHGE\VHJPHQW,QQHZSUHPLXP WUHQGVÀDWWHQHGVRPHZKDWGXHWR&29,'+RZHYHUPRVWFDUULHUVLQGLFDWHGWKDW individuals and groups were sticking with their existing carriers during the crisis, ZKLFKH൵HFWLYHO\GDPSHQHGQHZVDOHVZKLOHVLPXOWDQHRXVO\KDYLQJDSRVLWLYH impact on persistency, as reported consistently across health insurers. However, the commercial market share as a percentage of overall total medical premium (including 0DQDJHG0HGLFDLG0HGLFDUH$GYDQWDJHDQGWKH)HGHUDO(PSOR\HHV+HDOWK%HQH¿WV 3URJUDPKDVGHFOLQHGVWHDGLO\IURPLQWRXQGHULQ7KHGURS was not unexpected by AM Best, given the growth in government programs driven by Medicaid expansion and the growing senior population aging into Medicare, which has fueled rapid growth in both those core medical market segments. In addition more employer groups have moved to administrative only (ASO) or self-insured contracts in which the health insurer only administered the health plan and the employer is responsible for claim payments. Individual Segment: Since the rollout of the ACA, the individual commercial PDUNHWKDVKDGLWVFKDOOHQJHV7KHVHJPHQWKDVVHHQSUREOHPVZLWKZHEVLWH QDYLJDWLRQÀXFWXDWLRQVLQHQUROOPHQWDQGVL]DEOH¿QDQFLDOORVVHVIRULQVXUHUV For health insurers, after several years of high double-digit rate increases, as well as successful initiatives to enroll members with chronic conditions in disease- management programs to ensure that they received the proper care, the individual OLQHWXUQHGSUR¿WDEOHVHYHUDO\HDUVDJRZLWKUHFRUGSUR¿WDELOLW\LQ5DWHV ¿OHGLQWREHDSSOLHGLQDOVRIHDWXUHGVRPHRIWKHORZHVWUHTXHVWHGUDWH increases since inception, and some states even saw requests to cut rates. In March 2021, Congress passed the American Rescue Plan, which increased subsidies for PDQ\LQGLYLGXDOVIRU$&$LQGLYLGXDOFRYHUDJH7KHLQFUHDVHGVXEVLGLHVVKRXOG lower premiums for a large number of individuals and may increase individual enrollment. Group Segment 7KHIXOO\LQVXUHGHPSOR\HUJURXSVHJPHQWLQFOXGLQJERWKODUJH DQGVPDOOJURXSPDUNHWVKDVEHHQFRQVLVWHQWO\SUR¿WDEOHWKHODVWIHZ\HDUVZLWKD record year in 2020 for many health insurers. AM Best expects the positive trends to continue, although margins may contract due to factors such as a return to more normalized utilization and the lack of a widespread deferral of elective and non-urgent FDUHWKDWRFFXUUHGLQWKH¿UVWKDOIRIWKHRQJRLQJVKLIWWRVHOILQVXUHGFRYHUDJH unknowns such as future COVID waves and the impact on utilization; and the rise in prescription drug prices. Margins for the fully insured group business have been tight, ZLWKODUJHJURXSEXVLQHVVDYHUDJLQJMXVWRYHURYHUWKHODVW¿YH\HDUVZKLOHVPDOO JURXSEXVLQHVVKDVWUHQGHGXSWRZDUG Consolidated membership and revenue growth for group health insurance has been limited for many years. More employers currently elect to self-insure employee KHDOWKEHQH¿WVDQGDQLQFUHDVHGQXPEHURIVPDOOJURXSHPSOR\HUVQRORQJHUR൵HUCHAPTER 4: HEALTH www.ambest.com39 KHDOWKEHQH¿WV,QDGGLWLRQWKHSULFHRIKHDOWKFRYHUDJHKDVEHFRPHDIRFDOSRLQW when employers look to provide coverage for their employees. Many employers have LPSOHPHQWHGEHQH¿WPRGL¿FDWLRQVWRORZHUWKHLPSDFWRISUHPLXPUDWHLQFUHDVHVDW renewal, as well as increased employee cost sharing. Medicaid: After a brief period of Medicaid membership decline through year-end WKHSDQGHPLF¶VEURDGH൵HFWRQWKH86HFRQRP\IURPEXVLQHVVVKXWGRZQV DQGVWD\DWKRPHGLUHFWLYHVHDUO\RQLQWKHSDQGHPLFOHGWROD\R൵VDQGIXUORXJKV which had accelerated unemployment rates and started the reversal of this trend. 0HGLFDLGHQUROOPHQWLQDQGKDVH[SHULHQFHGVLJQL¿FDQWJURZWKGXULQJ the COVID public health emergency (PHE). During the period of the PHE, states are not permitted to perform redeterminations, which verify continued eligibility for Medicaid. Once the COVID PHE ends, states will have 12 months to complete the redetermination process. Senior Market 7KHLQFUHDVHLQWKHVHQLRUSRSXODWLRQDVZHOODVWKHSRSXODULW\RI managed care products, which are attractive due to low member-paid premiums DQGPRUHFRPSUHKHQVLYHEHQH¿WVKDVGULYHQJURZWKLQVHQLRUVHJPHQWSUHPLXP revenue and earnings for health insurers, a trend which is expected to continue in future years. Medicare Advantage: Medicare Advantage (MA) premiums grew favorably during WKHSDVWIHZ\HDUVH[FOXGLQJEOXHERRN¿OHUVZLWKDQDQQXDOJURZWKRIPRUHWKDQ RYHUWKHODVWWKUHH\HDUVDWUHQGWKDWLVPRVWOLNHO\WRFRQWLQXHJLYHQWKHDJLQJ population in the United States and the increased percentage of Medicare eligible individuals enrolling in MA products versus traditional Medicare. Enrollment has PRUHWKDQGRXEOHGRYHUWKHODVW\HDUVIURPPLOOLRQLQWRLQ VKRZLQJWKHJURZWKLQSRSXODULW\RIWKLVSODQZKLFKFDSWXUHVRIWKH0HGLFDUH EHQH¿FLDULHV Medicare Supplement: Medicare supplement premium and enrollment grew steadily IURPWKURXJKUHDFKLQJRYHUPLOOLRQPHPEHUVDQGELOOLRQSUHPLXPV Over one-third of individuals in traditional Medicare have Medicare supplemental coverage. Geographically, more people in rural areas are selecting traditional Medicare with a supplemental plan due to the decreased availability of MA plans. Major Types of Health Plans HMO (Health Maintenance Organization): Members select a primary care physician, who oversees all aspects of the members’ medical care and provides referrals to see specialists. Most services received from doctors or hospitals out of the plan’s network are not covered. PPO (Preferred Provider Organization): A network of doctors, hospitals and CHAPTER 4: HEALTH 40 other health care providers make up the organization, but the PPO also allows a member to go to specialists, out-of-network doctors or hospitals without needing prior authorization from a primary care physician. However, more of the costs to receive care outside the network are shouldered by the member. POS (Point of Service): 7KHPHPEHUGHVLJQDWHVDSULPDU\FDUHSK\VLFLDQEXW retains the option to receive services from doctors without a referral or go outside the network for care and shoulder a larger portion of the cost. Fee-for-service health plans, or indemnity plans, were once the traditional route for FRYHUDJH7KHUHLVQRQHWZRUNRISUHDSSURYHGSURYLGHUVVRDPHPEHUFDQFKRRVHWR YLVLWDQ\GRFWRURUKRVSLWDO7KHVHSODQVFRVWWKHPRVWDQGKDYHGZLQGOHGVKDUSO\LQ the past 30 years. 6RPHLQVXUHUVR൵HUSODQVWKDWFRPELQHDKLJKGHGXFWLEOHKHDOWKSODQ+'+3ZLWKD SUHWD[KHDOWKVDYLQJVDFFRXQW+6$7KH+6$SD\VIRUTXDOL¿HGDQGURXWLQHKHDOWK care expenses with tax-free money until the deductible is met; then the insurance FRYHUDJHWDNHVRYHU7KHIXQGVLQWKH+6$DOVRFDQEHXVHGIRUH[SHQVHVWKH+'+3 doesn’t cover, and HSA balances carry forward to future years. Products and Terms Health products come in a wide variety of forms and address basic health needs, ranging from preventative and basic medical care to specialized forms of illness and accident coverage. Health products include: Indemnity Health Plans: 7KHVHPD\EHR൵HUHGRQDQLQGLYLGXDORUJURXSEDVLV ,QGHPQLW\SODQVDOORZPHPEHUVWRFKRRVHWKHLURZQGRFWRURUKRVSLWDO7KHFDUULHU WKHQSD\VD¿[HGSRUWLRQRIWRWDOFKDUJHV,QGHPQLW\SODQVDUHRIWHQNQRZQDV³IHH IRUVHUYLFH´SODQV High-Deductible Health Plans: 7KHVHPD\IHDWXUHORZSUHPLXPVDQGDQLQWHJUDWHG deductible for both medical and pharmacy costs. Some plans combine a health plan with a Health Savings Account. Health Savings Accounts: Participants and/or their employers may contribute pretax PRQH\WREHXVHGIRUTXDOL¿HGPHGLFDOH[SHQVHV+6$VZKLFKDUHSRUWDEOHPXVWEH linked to a high-deductible health insurance policy. Health Reimbursement Arrangements: HRAs are funds provided by the employer that employees utilize for covered services. Any leftover funds can carry over from year to year. However, HRAs are not portable. Dental Plans: 7UDGLWLRQDOGHQWDOSODQVPD\KHOSFRYHUSUHYHQWLYHEDVLFDQGPDMRUVHUYLFHVCHAPTER 4: HEALTH www.ambest.com41 Dental Preferred Provider Organizations: 7KHVHR൵HUGLVFRXQWVWRPHPEHUVZKR use in-network dental providers. Vision Plans: Vision care plans may cover regular eye exams, treatment for conditions and assistance with corrective lenses. Pharmacy: Plans may cover part or all of prescription drug costs. Flexible Spending Account: A program where employees may contribute pretax money to be used for medical expenses, including copays, coinsurance, and any non-covered services or over-the- FRXQWHUPHGLFDWLRQ)XQGVLQDÀH[LEOH spending account cannot be carried over from year to year. Medicare Advantage: 7KLVSURYLGHV Medicare-eligible individuals the EHQH¿WVRIWUDGLWLRQDO0HGLFDUH SOXVDGGLWLRQDOIHDWXUHVDQGEHQH¿WV such as wellness program and case management services. Individuals who select Medicare Advantage agree to use in-network doctors and hospitals or face much higher out-of pocket costs. Common Health Insurance Terms Coinsurance: For health insurance, it is a percentage of each claim after the GHGXFWLEOHLVSDLGE\WKHSROLF\KROGHU)RUDKHDOWKLQVXUDQFHFRLQVXUDQFHFODXVH WKHSROLF\KROGHUSD\VIRUWKHGHGXFWLEOHSOXVRIFRYHUHGEHQH¿WV$IWHUSD\LQJ RIORVVHVXSWRDQRXWRISRFNHWPD[LPXPWKHLQVXUHUVWDUWVSD\LQJRI losses. Copayment: $SUHGHWHUPLQHGÀDWIHHDQLQGLYLGXDOSD\VIRUFRYHUHGKHDOWKFDUH services, in addition to what insurance covers. For example, some HMOs require DFRSD\PHQWIRUHDFKR൶FHYLVLWUHJDUGOHVVRIWKHW\SHRUOHYHORIVHUYLFHV SURYLGHGGXULQJWKHYLVLW&RSD\PHQWVDUHQRWXVXDOO\VSHFL¿HGE\SHUFHQWDJHV Disease Management: A system of coordinated health care services and communications with members who have certain medical conditions. US Health – Reinsurance Ceded (Orange book/DMHC filers only) Source: AM Best data and research 20202019201820172016201520142013201220102011 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 0 5 10 15 20 25 30 35 Ceded/Gross Premium (%) Reinsurance Ceded ($ billions) Reinsurance CededCeded/GrossSPOTLIGHT 42 A Healthy Dose of Reality Exercise has always been a passion for Discovery Ltd. Founder and Chief ([HFXWLYH2൶FHU$GULDQ*RUH+HRQFH took an already grueling travel schedule and added stair running in hotels and airports and between meetings in his R൶FH ,Q*RUH²MXVW\HDUVROG² created a unique rewards-based health insurance model to improve individuals’ wellness and enhance their lives 7RGD\'LVFRYHU\LPSDFWVPRUHWKDQ PLOOLRQOLYHVLQPDUNHWV7KHLQVXUWHFK made a global name for itself with its Vitality business model, which rewards PHPEHUVZLWKLQH[SHQVLYHÀLJKWV discounts and other perks for meeting health goals and making positive lifestyle changes such as increasing physical activity, eating more healthfully and getting annual preventive screenings. Q.How did the idea for Discovery come about, and how is the insurtech using innovation and behavioral science to create a shared value insurance model that rewards individuals for healthy behaviors while driving down health care costs? A.When we started Discovery in the HDUO\VWKHUHZDVDFOHDUQHHGIRU a sustainable approach that integrated traditional medical aids and health LQVXUDQFH7KDWZDVWKHHPEU\RIRURXU vision of building an actuarially sound health insurance organization focused on demand-side management—namely, making people healthier. At the time, behavioral economics ZDVQ¶WDZHOONQRZQ¿HOGEXWZHKDG an intellectual hunch that we could incentivize people to adopt healthier behaviors and embed that into our business model. Over time, the data and UHVXOWVFRQ¿UPHGWKDWKXQFK:HFDPH to understand that people’s behavioral biases around wellness, such as putting R൵WKDWUXQRUKHDOWK\IRRGFKRLFHDFWHG against their own best interests, and we sought to nudge people in the right direction through a behavior change model called Vitality. 7KH9LWDOLW\PRGHOLVXQLTXHLQWKDW it prices the value created through behavior change into the cost of insurance. It provides clients with personalized goals, rewards them for meeting goals, captures the economic value created or lower claims, and shares that value with clients by using it to fund the incentives and rewards that drive healthier behavior. Adrian GoreSPOTLIGHT www.ambest.com43 7KH9LWDOLW\PRGHOKDVEHHQSURYHQWR drive better health care outcomes, with highly engaged members demonstrating ORZHUKRVSLWDODGPLVVLRQV WRORZHUKRVSLWDOFRVWVDQG shorter hospital stays. Vitality members LQ6RXWK$IULFDOLYH\HDUVORQJHU than the average insured population. Reinsurers have also validated the long-term mortality impact of Vitality, ZLWKPHPEHUVKDYLQJRQDYHUDJH improved mortality rates, and highly HQJDJHGPHPEHUVVKRZLQJD reduction in mortality. 6LPLODUO\LQRXUDXWRLQVXUDQFHR൵HULQJ highly engaged Vitality drivers in South $IULFDKDYHIHZHUDFFLGHQWVWKDQ WKHZRUVWRUXQHQJDJHGGULYHUVDQG have fewer severe accidents. 7KHJOREDOSDQGHPLFKDVIXUWKHU demonstrated the important role the insurance sector can play in helping keep its customers healthy. Q.How important is it to incentivize healthy behaviors? A.Never has our shared value model been more relevant than during the current global pandemic, which has exposed the link between noncommunicable diseases and infectious diseases. 7KHSDQGHPLFKDVPDJQL¿HGWKH importance of addressing lifestyle- related risk. Global research GHPRQVWUDWHVWKDWPRUHWKDQ RI&29,'UHODWHGGHDWKVDUH attributed to individuals with three or more comorbidities, such as diabetes or heart disease. We are now seeing that behavior can determine not only noncommunicable disease risk but communicable disease risk as well. For example, according to our data analysis of South African cases, a 65-year-old male who does not exercise and has no other chronic conditions KDVDKLJKHUFKDQFHRIG\LQJIURP D&29,'LQIHFWLRQWKDQD\HDUROG with no chronic conditions. In contrast, a 65-year-old male with no chronic conditions and who exercises for 30 minutes four times per week has a risk ORZHUWKDQD\HDUROGZKRGRHV not exercise at all. Business models that help make people healthier, while simultaneously lowering the price of insurance, have the potential to make a profound contribution to society by building resilience against both noncommunicable and communicable diseases and helping individuals and health care systems weather severe shocks. Q.How are you leading your company in this time of disruption? 7KHULVLQJVRFLHWDOH[SHFWDWLRQVIRU companies to act responsibly have QRZUHDFKHGDFOLPD[7KHUHLVQRZ a fundamental recognition that the purpose of business cannot be narrowly focused on making money without regard for how it interacts with the sustainability and well-being of the societies and environments in which it operates. —Lori ChordasCHAPTER 5: REINSURANCE/ART 44 Overview of Reinsurance Broadly put, reinsurance is insurance for insurers. Insurance companies face many risks in their daily operations, including: s Asset risks, or the changing nature of investment values. s Credit risk, or the obligations owed by customers and/or debtors. s Liability risk, or potential losses due to inadequate pricing or reserving, or from catastrophes and other events. 5HLQVXUDQFHLVDWUDQVDFWLRQWKDWLQGHPQL¿HV the primary insurer against those potential ORVVHV7KHSULPDU\LQVXUHURUFHGLQJ company, transfers a portion of risk to the reinsurer. How much risk and what FRQGLWLRQVWULJJHUWKHUHLQVXUDQFHDUHVSHFL¿HGLQWKHWUHDWLHV*HQHUDOO\WKHSULPDU\ carrier retains a fair amount of the risk. Reinsurance allows insurers to increase the maximum amount they can insure. However, most reinsurance contracts do not absolve the ceding insurer’s responsibility to pay the LQVXUDQFHFODLPVVKRXOGWKHUHLQVXUHUIDLO7KH¿UVWUHLQVXUDQFHFRPSDQLHVZHUHERUQ RXWRIDPDMRU¿UHLQWKDWEXUQHGDODUJHVHFWLRQRI+DPEXUJ*HUPDQ\DQGNLOOHG DWOHDVWSHRSOH7KHFRQÀDJUDWLRQH[SRVHGWKHLQDELOLW\RILQVXUHUVWRFRSHZLWKVXFK a catastrophe, and the insurers recognized the need to distribute risk portfolios among several carriers. )RUDEDVLFUHLQVXUDQFHVFHQDULRWDNHDQR൶FHEXLOGLQJZRUWKPLOOLRQ$SULPDU\ FDUULHUPD\DFFHSWWKHULVNRIORVVDQGWKHQWXUQWRDUHLQVXUHUDJUHHLQJWRFRYHUWKH¿UVW $10 million and ceding the rest. If losses at the building then were to exceed the primary OD\HURIPLOOLRQVD\PLOOLRQWKHUHLQVXUHUZRXOGEHFDOOHGXSRQWRFRYHUWKH UHPDLQLQJPLOOLRQ In a case like this, the arrangement is said to be a nonproportional agreement, also known as an excess of loss agreement. In proportional agreements, the primary insurer and reinsurer share the liability risk proportionately. In the case of a quota share agreement, the SULPDU\LQVXUHUDQGUHLQVXUHUVSOLWWKHSUHPLXPVDQGORVVHVRQD¿[HGSHUFHQWDJHEDVLV 7KHWZREDVLFW\SHVRIUHLQVXUDQFHDUUDQJHPHQWVDUHWUHDW\DQGIDFXOWDWLYH7UHDW\ reinsurance contractually binds the insurer and reinsurer together, with respect to certain Global Reinsurance – Total Dedicated Reinsurance Capital Source: AM Best data and research; Guy Carpenter (USD billions) Third-Party Capital Traditional Capital 292 320 340 332 345345 341 394 429 441 19 48 60 68 75 8795 88 88 91+ 0 100 200 300 400 500 600 2012201320142015201620172018201920202021PCHAPTER 5: REINSURANCE/ART www.ambest.com45 VSHFL¿HGEXVLQHVV7KHWUHDW\UHTXLUHVWKHLQVXUHUWRFHGHDOOWKHULVNVVSHFL¿HGE\WKH DJUHHPHQWZLWKWKHUHLQVXUHUDQGWKHUHLQVXUHUPXVWDVVXPHWKRVHVSHFL¿HGULVNV7KLV means that the reinsurer automatically takes the risk for all policies that are covered by the treaty, and not just one particular policy. )DFXOWDWLYHUHLQVXUDQFHRQWKHRWKHUKDQGLVGRQHPRUHRQDFDVHE\FDVHEDVLV7KH reinsurance is issued after an individual analysis of the situation and by deciding coverage FDVHE\FDVH7KHUHLQVXUHUFDQGHWHUPLQHLILWZDQWVVRPHRUDOORIWKHULVNDVVRFLDWHGZLWK WKDWSDUWLFXODUSROLF\7KLVDUUDQJHPHQWXVXDOO\WDNHVSODFHZKHQWKHULVNVDUHVRXQXVXDO or so large that they aren’t covered in the insurance company’s standard reinsurance treaties. Reinsurers also can purchase reinsurance to cover their own risk exposure or to increase WKHLUFDSDFLW\7KLVSURFHVVLVFDOOHGDUHWURFHVVLRQ Developing Issues in Reinsurance AM Best’s annual report on the global reinsurance industry highlights reinsurers’ front- row position on product and business innovation. 7KHUHLQVXUDQFHVHJPHQWLVRQHRIWKHPRVWLQQRYDWLYHGXHWRWKHOHYHORIVRSKLVWLFDWLRQ in product development and capital management. Reinsurers have become more active DWZRUNLQJZLWKLQVXUWHFKVVHYHUDORIWKHPH൵HFWLYHO\GLJLWDOPDQDJLQJJHQHUDODJHQW 0*$VWDUWXSV9ROXPHVLQYROYHGDUHVWLOOUHODWLYHO\VPDOOEXWJURZLQJUDSLGO\7KH FRPELQDWLRQRIDORZFRVWGLVWULEXWLRQFKDQQHODQGDQH൶FLHQWDGPLQLVWUDWLRQDQGFODLPV platform, added to robust capital support and underwriting expertise from reinsurers, seems appealing. Start-up expenses and prudent management of technically SUR¿WDEOHJURZWKFDQEH a challenge, but this is mitigated by the potential advantages of having access to granular insureds’ data LQUHDOWLPHDPRUHUH¿QHG understanding of customers’ behaviors, and abundant opportunities for new product development in a more digitized world. 7KHVHLQLWLDWLYHVDOZD\V KDYHWKHSRWHQWLDORIFRQÀLFW with cedants and brokers. Global Reinsurance – Estimated Total Third-Party Capital Source: AM Best data and research; Guy Carpenter 41 45 49 62 56 55 53 14 18 21 20 34 29 29 5 5 5 5 5 5 6 0 10 20 30 40 50 60 70 80 90 100 2014201520162017201820192020 (USD billions) Direct Institutional Investors Reinsurance Sponsored Managers (incl Sidecars) Dedicated ILS ManagersCHAPTER 5: REINSURANCE/ART 46 $FRPPRQVWUDWHJ\LVWRRSHUDWHWKURXJKYHU\ZHOOGH¿QHGEXVLQHVVXQLWVVHSDUDWH VXEVLGLDULHVDVDPLQRULW\LQYHVWRURUWKURXJKDJUHHPHQWVZLWKWKLUGSDUWLHV7KHIRFXV tends to be on new niches, product lines, or customer segments where the likelihood IRUFRQÀLFWZLWKSUHYLRXVEXVLQHVVSDUWQHUVLVPLQLPL]HG6RPHWLPHVEURNHUVDQG LQVXUHUVDUHR൵HUHGWKHRSSRUWXQLW\WRSOD\DFOHDUUROHDVSDUWQHUVQRWDVFRPSHWLWRUV ,WLVD¿QHEDODQFLQJH[HUFLVH5HLQVXUHUVDUHVWLOOLQYHVWLQJPRGHVWO\LQWKHVHDUHDVEXW LQDPHWKRGLFDODQGRUJDQL]HGZD\ZLWKZHOOGH¿QHGEXGJHWVDQGFORVHPRQLWRULQJ of outcomes, trying to keep abreast of the latest technological developments to retain relevance. As for a shift toward more stable results, the most visible changes relate to property natural catastrophe. At reinsurers’ request, retention levels have increased, limits lowered, and contract language tightened. Reinsurers’ cover has moved upwards in the tower. Closer cooperation with third-party capital for retro cover is evident, thanks to the large size and long-term horizon of the most dominant, committed investors; a lack of other LQYHVWPHQWRSSRUWXQLWLHVH[SHFWHGKLJKHUUHWXUQVDQGWKHUHJXODWRU\H൶FLHQF\RIWKH capital markets (in particular, catastrophe bonds). Despite third-party capacity having VWDELOL]HGLQWKHSDVWWZR\HDUVZHVHHSRWHQWLDOIRUUHQHZHGH[SDQVLRQ7KHUHLVFOHDU interest in diversifying away from nat cat risks toward casualty lines. However, challenges in price modeling remain, as does the mismatch of term horizons between liabilities and LQYHVWRUV¶H[SHFWDWLRQV3RWHQWLDOFRQÀLFWZLWKWUDGLWLRQDOFDSLWDODOVRFDXWLRXVO\LQWHUHVWHG LQH[SDQGLQJLQWRWKRVHOLQHVPD\EHDQRWKHUREVWDFOHWRVLJQL¿FDQWFKDQJHLQWKHULVN SUR¿OHRIWKHLQVXUDQFHOLQNHGVHFXULWLHVPDUNHWV Alternative Risk Transfer and Risk Financing 7KHEOXUULQJRIERXQGDULHVEHWZHHQLQVXUDQFHDQGFDSLWDOPDUNHWVLVPRVWHYLGHQWLQ VWUXFWXUHG¿QDQFHSDUWRIDQDUHDWKDWLVEURDGO\NQRZQDVDOWHUQDWLYHULVNWUDQVIHU 7KHKLJKHVWSUR¿OHPHPEHUVRIWKH$57FRPPXQLW\DUHFDSWLYHV²LQVXUDQFHRU reinsurance companies owned by their insured clients and located in jurisdictions, or domiciles, that may be tax-friendly or may have reduced capital and reserve requirements. Captives typically are formed by one or more noninsurance companies when traditional market coverage is more limited, or when the parent companies wish to have more direct control of their own risks. 6WUXFWXUHG¿QDQFHLVDFRPSOH[SURFHVVRIWUDQVIHUULQJULVNRIWHQZLWKWKHSXUSRVHRI raising capital. Much of the activity revolves around risk securitization, whereby the involved assets are not used as collateral as is typically found in a loan scenario. Instead, funds from investors are advanced to the originator based on the history of those assets, LQGLFDWLQJDFDVKÀRZLQWRWKHRULJLQDWRU¶VEXVLQHVV7KHDVVHWVDUHWKHQWUDQVIHUUHGE\ the originator to a separate legal entity—a special purpose vehicle—that in turn issues VHFXULWLHVWRWKHLQYHVWRUV,QWHUHVWDQGSULQFLSDOSDLGRQWKRVHVHFXULWLHVDUH¿QDQFHGE\ WKHFDVKÀRZCHAPTER 5: REINSURANCE/ART www.ambest.com47 Insurance-Linked Securities and Structured Transactions Capital markets participants, reinsurers, brokers and insurers continue to collaborate in YDULRXVFRPELQDWLRQVWRFUHDWHQHZULVNEDVHGR൵HULQJVLQFOXGLQJ Natural Catastrophe Bonds: An alternative to reinsurance, these securities are used by LQVXUHUVWRSURWHFWWKHPVHOYHVIURPQDWXUDOFDWDVWURSKHV7\SLFDOO\WKH\SD\KLJKHU\LHOGV because investors could lose their entire stake in the event of a disaster. If the catastrophe happens, the funds go to the insurer to cover claims. Best’s Rankings Top 25 World’s Largest Reinsurance Groups Ranked by Unaffiliated Gross Premiums Written in 2019 (US$ Millions) 1 Reinsurance Premiums WrittenTotal <—--—-Ratios 3 —-——->Life & Non-LifeNon-Life OnlyShareholders’ RankingCompany NameGrossNetGrossNetFunds 2 LossExpenseCombined 1Munich Reinsurance Company45,84643,09630,23729,01136,84574.730.9105.6 2Swiss Re Ltd. 36,57934,29321,51220,63627,25878.730.3109.0 3Hannover Rück SE 4 30,42126,23220,56817,44914,54372.829.1101.9 4SCOR S.E.20,10617,9108,7957,6957,58870.230.1100.2 5Berkshire Hathaway Inc.19,19519,19513,33313,333451,33680.825.4106.2 6China Reinsurance Group Corporation16,66515,4536,4226,02015,77268.033.8101.8 7Lloyd's 5, 6 16,51112,21316,51112,21345,01073.733.9107.6 8Canada Life Re14,55214,497N/AN/A21,137N/AN/AN/A 9Reinsurance Group of America Inc.12,58311,694N/AN/A14,352N/AN/AN/A 10Korean Reinsurance Company7,7775,4326,4274,2292,26184.614.999.6 11Everest Re Group Ltd.7,2826,7687,2826,7689,72676.326.7103.0 12PartnerRe Ltd.6,8766,3015,3774,8267,32779.526.5106.0 13General Insurance Corporation of India 7 6,4815,7736,3105,6087,28991.721.4113.1 14RenaissanceRe Holdings Ltd.5,8064,0965,8064,0967,56074.027.9101.9 15AXA XL5,3264,2015,3264,20113,23880.530.5111.0 16Transatlantic Holdings, Inc5,2374,8455,2374,8455,37772.930.7103.6 17Arch Capital Group Ltd. 11 4,2012,9954,2012,99513,92976.035.8111.8 18MS&AD Insurance Group Holdings, Inc. 7, 8 3,922N/A3,922N/A15,007N/AN/A101.712 19Assicurazioni Generali SpA3,8313,8311,1221,12239,05680.829.4110.2 20R+V Versicherung AG 9 3,7853,7853,7853,7852,64183.124.5107.6 21MAPFRE RE, Compañía de Reaseguros S.A. 10 3,6003,0033,0042,4162,17569.129.398.4 22Sompo International Holdings, Ltd.3,5803,0883,5803,0887,38667.229.596.7 23The Toa Reinsurance Company, Limited 7, 8 3,1042,5792,2261,8012,79272.435.0107.4 24AXIS Capital Holdings Limited2,8091,9792,8091,9795,29676.427.4103.8 25Validus Reinsurance, Ltd.2,4091,8232,4091,8233,43977.427.8105.2 1 All non-USD currencies converted to USD using foreign exchange rate at company’s fiscal year-end. 2 As reported on balance sheet, unless otherwise noted. 3 Non-Life only. 4 Net premium written data not reported, net premium earned substituted. 5 Lloyd’s premiums are reinsurance only. Premiums for certain groups within the rankings also may include Lloyd’s Syndicate premiums when applicable. 6 Total shareholders’ funds includes Lloyd’s members’ assets and Lloyd’s central reserves. 7 Fiscal year ended March 31, 2021. 8 Net asset value used for total shareholders’ funds. 9 Ratios are as reported and calculated on a gross basis. 10 Premium data excludes intergroup reinsurance. 11 Based on Arch Capital Group Ltd. consolidated financial statementsand includes Watford Re segment. N/A = Information not applicable or not available at time of publication. Source: AM Best data and researchNext >