A mechanism exists within the insurance industry to facilitate the transfer of risk associated with existing insurance liabilities. This involves one insurance entity ceding a defined portion of its loss reserves, coupled with the corresponding obligations, to another insurance entity. A fundamental example involves an insurance company seeking to remove older, less predictable liabilities from its balance sheet. This is achieved by transferring those liabilities, along with a commensurate amount of assets, to another insurer, often a specialist in managing run-off business.
The utility of such an arrangement stems from several factors. It allows companies to focus on core competencies and future growth by offloading legacy liabilities. Furthermore, it provides potential capital relief and reduces the administrative burden associated with managing claims from older policy years. Historically, these arrangements arose as a way to deal with discontinued lines of business or to manage significant, unexpected loss events affecting a company’s solvency.
