Start with the risk objective
Reinsurance can protect capital, reduce earnings volatility, expand underwriting capacity or limit concentration. The optimal structure depends on which objective is binding and how it interacts with risk appetite.
A comparison based only on expected ceded loss and premium misses the value of protection in adverse states and the cost of basis, counterparty and operational risk.
Evaluate the full distribution
Analysis should compare retained loss distributions, capital impacts, earnings volatility and liquidity across structures. Occurrence, aggregate and proportional covers respond differently to frequency, severity and clustering.
Parameter and model uncertainty should be visible. A structure that appears efficient under one loss model may be fragile to alternative views of dependence, inflation or event definition.
Include contract mechanics
Attachment, exhaustion, reinstatement, exclusions, hours clauses and claims cooperation can materially change effective protection. The modelling representation should be reconciled to contract wording and tested through realistic claims examples.
Basis risk should be quantified where possible and described where not. Decision-makers need to understand the states in which the cover may not respond as expected.
Assess execution and recoverability
Counterparty credit quality, collateral, concentration, dispute risk and claims-payment timing affect the value of recoverables. Liquidity analysis should recognise that the insurer may pay claims before receiving reinsurance cash.
A sound recommendation presents expected cost, tail protection, capital effect, liquidity timing and residual risks together, enabling an explicit trade-off rather than a single optimisation score.