Risk Transfer Flashcards
Define EML
the largest loss that is reasonably expected to arise from a single event on an insured property
Why EML may be used:
Determining how much reinsurance to take
Measure for the risk
Important in commercial property
In surplus reinsurance is used to determine the proportional split of risk
Benefits of reinsurnace
Reduction in claims volatility:
smoother profits
reduced capital requirements
increased capacity to write more risks
achieve diversification
economies of scale
limitations of large losses arising from:
single claim on single risk
single event
cumulative events
geographical and portfolio concentrations of risk
reduce risk of insolvent and enable to write large risks
access to expertise and data of reinsurer
Define reinsurance
an arrangement whereby the insurer, in consideration for a premium, agrees to indemnify cedant against part or all of an insurance liability
How could a mix of proportional and non-proportional reinsurance improve mortality risk exposure
Allow to vary the % of each risk shared
might choose to keep larger/smaller proportions
consider CAT XL reinsurance
conside aggregate XL treaty
consider stop loss
Characteristics of quota share
Write more business with its available capital and get greater diversification
Doesn’t cape claims
Ceding profits to reinsurer
Characteristics of excess of loss
Protected against large individual claims
Doesn’t protect against a poor claims experience generally
Still exposed to claims in excess of the highest layer
Exposed to credit risk from reinsurers
Ceding profits to reinsurers
Access to expertise
Write larger risks
Layers still not decided? Leave gaps
describe how Risk XL works
non-proportional reinsurance cover
applies to individual losses or affecting one insured risk at any time
when a claim happnes and it is higher than a specified limit then claims above this limit will be passed to the reinsurer
but only up to the upper limit
above the upper limit claims may revert back to the insurer
or enter another layer of a sparate Risk XL agreement
benefit of using Risk XL benefits
limit exposure from large exposures
reduce in claims volatility
smoother profits
reduced capital requirements
able to write larger risks
may improve diversification
reduce risk of insolvency
access to reinsurer support
How would you use data and model to assit with structuring and pricing the risk XL reinsurance
taking the most recent exposure provided and simulating claim events
run simulations to obtain a distribution of results without reinsurance
proceed and apply a variety of Risk XL structures including attachment points
for each structure, generate a new distribution of claims and some margins and how it is improved with reinsurance
each structure will show the distribution of reinsurance will be used as basis for reinsuance premium
allowances made for expenses and commission and profit
necessary to add margins for uncertainty
describe surplus reinsurance and why better than quota share
Proportional reinsurance cover
proportion van cary by risk reinsured
the % ceded will determine the % of each claim that the reinsurer will settle
does not cap maximum loss on large claims
written by treaty
for high volume businesses, retention limit and maximum cover specified in treaty
can decide on proportion to cede for each risk
provides high flexiblity to highly volatile risks
allow insurer to fine-tune their exposure by ceding larger complex risks and retain comfortable risks
Why consider ART contracts
provision of cover not otherwise available
stabilisation of results
cheaper cover
tax advantages
greater security for payment
more effective provision of risk management
management of solvency margins
source of capital
