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PIN A2.14 Guidance

1. Management of reinsurance risk relates to the selection, monitoring, review and control of reinsurance arrangements — that is, where some part of an Insurer's individual or aggregate insurance risks is ceded to other Insurers, whether by a direct Insurer to a reinsurer or by a reinsurer to other reinsurers.
2. An Insurer should inform the DFSA immediately if there is a likelihood of a problem arising with its reinsurance arrangements that is likely to materially detract from its current or future capacity to meet its obligations, and discuss with the DFSA its plans to redress this situation. Problems that might trigger such a situation could include the insolvency of a reinsurer with a significant share in the Insurer's programme, discovery of exposures without current reinsurance coverage, or exhaustion of reinsurance covers through multiple losses.
3. Each Insurer is required (by PIN Rule 2.3.5) to maintain a written reinsurance management strategy which must be appropriate to the size and complexity of operations of the Insurer and must define and document the Insurer's objectives and strategy for reinsurance management.
4. An Insurer's reinsurance management strategy should, at a minimum, include the following elements:
a. systems for the selection of reinsurance brokers and other reinsurance advisers;
b. systems for selecting and monitoring reinsurance programmes;
c. clearly defined managerial responsibilities and controls;
d. clear methodologies for determining all aspects of a reinsurance programme, including:
i. identification and management of aggregations of risk exposure;
ii. selection of maximum probable loss factors;
iii. selection of realistic disaster scenarios, return periods and geographical aggregation areas; and
iv. identification and management of vertical and horizontal coverage of the reinsurance programme;
e. selection of participants on reinsurance contracts, including consideration of diversification and credit worthiness; and
f. systems for identifying credit exposures (actual and potential) to individual reinsurers or Groups of connected reinsurers on programmes that are already in place.
5. Senior management should review an Insurer's reinsurance management systems on a regular basis. The review should cover:
a. the identification and recording of policies underwritten to which reinsurance is attached;
b. the identification of the dates when an obligation to pay reinsurance premiums arises;
c. the identification of losses triggering recoveries under reinsurance contracts;
d. management of the timing of payments to, and collections from, reinsurance counterparties;
e. the credit standing and capacity of reinsurance counterparties to meet obligations to which they are subject as a result of claims incurred or to which they would become subject in the event of occurrence of losses;
f. any concentration of reinsurance arrangements with reinsurance counterparties which would create large exposures or detract from diversification benefits in the event of occurrence of losses;
g. the extent of reliance on reinsurance with related parties, and the accessibility of intra-group funding under a range of realistic conditions; and
h. the impact of any adverse trends in estimated Insurance Liabilities on the adequacy of the Insurer's reinsurance arrangements, and any implications for the capacity of the Insurer to meet its future policyholder obligations.
6. Procedures for assessing the credit standing of reinsurance counterparties may include the following:
a. establishment of a security committee with a specific brief to undertake the procedures;
b. obtaining appropriate advice from reinsurance brokers;
c. review of ratings published by ratings agencies;
d. monitoring of key performance indicators in reinsurers' published reports; and
e. consideration of general conditions in the relevant reinsurance market.

Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]