11 - Managing Exposure Flashcards
Starting from higher profits, what is the typical cycle in the insurance market?
Higher profits leads to –>
Higher capacity leads to –>
Lower premiums leads to–>
Lower profits leads to–>
Lower capacity leads to–>
Higher premiums leads to–>
Higher profits…and the cycle begins again
What are some examples of how the cycle of the insurance market may be shortened?
- Changes to legislation creating new liabilities
- Major disasters such as weather related incidents, NatCats, or acts of terror
- Changes to underwriting policy
What is EML?
Estimated Maximum Loss
For which line of business is EML particularly important?
Commercial property and BI
Why is estimated maximum loss needed?
The maximum exposure for any one event may not be the same as the sum insured , particularly if the risk is spread across more than one location, eg. if there are two factories it is unlikely they would both be destroyed by the same event.
The EML helps the underwriter decide if the risk is acceptable, how much if any they are willing to take on, and if reinsurance would be desirable.
Due to risk accumulation, insurers must be particularly aware of loss exposures arising from what?
Single risks
Single events
What is meant by layering of liability?
If a proposer wishes to take out a policy for a £20 million limit of liability but can only find an insurer willing to accept a limit of liability of £10 million, they may place this £10 million then arrange additional policies with other insurer(s) in excess of this £10 million to reach the £20 million limit they require.
i.e. they may have a primary layer of £10 million and another policy, an excess layer, covering £10 million in excess of £10 million.
What is meant by single event exposures?
Exposures to multiple losses arising from the same event, e.g. hurricane, CAT losses
What can be done about single event exposures in order to manage the risk?
Reinsure
What is reinsurance?
The underwriter, having accepted a risk, seeks to pass some of that risk on to other insurers or specialist reinsurers to limit their exposure to the risk.
Why an underwriter might want to take out reinsurance?
To protect against single large events or claims
To protect against claim fluctuations from year to year
To limit capacity
Risk is above acceptable levels
Entering a new market
If a claim arises on a policy which the insurer has reinsurance on, who is legally bound to pay for the claim?
The insurer - they are legally bound to pay for losses arising before seeking to claim indemnity under the reinsurance contract.
What are the two main types of reinsurance?
Proportional
Non-proportional
What are the two sub-categories of proportional reinsurance?
Quota share
Surplus
What are the sub-categories of non-proportional reinsurance?
Excess of loss
Stop loss (also called excess of loss ratio)
What is proportional reinsurance?
The reinsurer accepts an agreed percentage of the risk to be passed onto them and agrees to pay any losses in the same percentage.
(If a reinsurer takes 20% of the risk from the insurer - the sum insured - for that risk, he will receive 20% of the premium paid by the insured to the insurer, and should there be a loss on that risk, he will pay 20% of the loss paid by the insurer to the insured)
What is quota share reinsurance?
An insurer has an agreement (treaty) with a reinsurer applying to all insurances written that comply with the terms of a treaty. The reinsurer will automatically accept liability for their share of any policy written that falls within the treaty.
For example if an insurer has a treaty covering 20% of its property line of business, 20% of all policies written would be covered by the reinsurer.
What is the main advantage and disadvantage of quota share reinsurance?
Advantage: Easy to administrate which lowers costs.
Disadvantage: The insurer cannot be selective about their risk retention - even if they would be willing to retain all of the risk it would still be reinsured and so they would pay a reinsurance premium on it.
When is quota share reinsurance normally used?
By new insurers or when a insurer starts to write a new line of business.
What is surplus reinsurance?
The insurer only takes out reinsurance on risks that exceed their own retention limit. They take out additional lines of reinsurance equal to the maximum line they wish to retain.
e.g. if a risk is £500,000 but they wish to retain only £100,000 they would take out 4 lines of reinsurance for £100,000 each.
What are the main advantages and disadvantages of surplus reinsurance?
Advantage: The insurer can be more selective about when they take out reinsurance.
Disadvantages: The cost of administrating this is higher as it requires more active involvement.
What is non-proportional reinsurance?
The reinsurer agreed to contribute to all losses exceeding a pre-agreed figure.
What is excess of loss reinsurance?
The reinsurer agrees to take on the part of the risk in excess to the insurer’s retention.
e.g the insurer writes a policy with a £50 million limit of indemnity. It then takes out reinsurance on this policy with a £25 million excess £25 million limit. This means the insurer has retained a £25 million limit and any claims exceeding this are passed to the reinsurer.
On what basis can excess of loss reinsurance be taken out?
Per risk or per event
