Reinsurance Capital or Credential

Reinsurance: Capital or Credential?

In my (old?) worldview, reinsurance is part of capital structure, a substitute for debt or equity.

Principal agent and information theories posit actors spend money to credentialize themselves. They buy reinsurance to ensure a more stable stream of earnings and thereby get a lower cost of capital from investors (because they generate a better track record and are more trusted).

Thus, there are two reasons to buy re: as capital and as a credential. There is an interesting circularity too. More effective credential buys lower the cost of capital and make capital buys less efficient. And, of course, capital buys generally have a credential component.

QS is more capital centric. There is no leverage and essentially no smoothing effect. Surplus relief makes this clear in its name!

Cat is both, obviously. It has a clear capital equivalence and strong smoothing effect. Though most of the time it does nothing for credentials. And uws tend to hide behind market losses.

Property per risk excess is almost all credential. No model gives it any capital benefit.

Fac is a credential enhancement for the IR underwriter making the decision.