Insurers are increasingly using reserve transactions such as loss portfolio transfers and adverse development covers to liberate capital supporting past reserves and redirect it toward premium growth. Many recent transactions were specifically designed to maximize relief from rating agency or regulatory capital requirements. Such deals are not new, but they have become a mainstream tool in the capital toolkit.

Executive Summary

A compelling alternative to more traditional "hard capital," reserve transactions such as loss portfolio transfer and adverse development covers are attracting demand and supply, according to Seth Ruff, a TigerRisk partner who specializes in these reinsurance deal placements. Here, he provides some drivers of demands from carriers, including the need to improve RBC and BCAR ratios and to reduce uncertainty, as well as finding capital to take advantage of the best market in a decade.

Reserve transactions can improve a carrier’s Best’s Capital Adequacy Ratio (BCAR) or risk-based capital (RBC) ratio, and improvements in these solvency ratios can mean the ability to devote capital to higher purposes. Further, rating agencies and analysts view legacy transfer covers favorably for their ability to lessen volatility and eliminate drag on earnings.

Such reserve transactions represent a compelling alternative to more traditional “hard capital.” There are situations where issuing debt or equity is the best option, however, reserve transactions have certain advantages. Generally, reserve transactions are quicker to execute, not dilutive, highly customizable and lower cost. And, critically, reserve transactions also transfer the risk of adverse development.

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