19 - Reinsurance and general risk management Flashcards

Question

Explain the concept of 'calculating risk premiums' in reinsurance. What factors does the reinsurer consider?

Answer 1

The reinsurer determines its risk premium rates by assessing the likely experience of the business that it is to reinsure and then adding expense and profit margins.

Answer 2

Quota share is a type of proportional reinsurance and is always by treaty. It is a simple mechanism for ceding risk on a portion of the business, either on an original terms or risk premium basis, as already discussed, or for short-term business, on an original terms basis. The premiums can either be calculated on a risk premium or original terms basis. Advantages to an insurer include it cedes the same proportion of each risk, irrespective of size. A large, established insurer will be far less dependent than a small, new insurer. Main disadvantages to an insurer of ceding business by quota share are that it cedes the same proportion of each risk, irrespective of size. The insurer may wish to cede a greater proportion of the larger risks than their smaller ones, owing to their greater loss potential. It passes a share of any profit to the reinsurer.

Answer 3

Under a surplus reinsurance arrangement, the long-term insurer will cede to the reinsurer all sums that exceed its retention on each individual life. The key difference between quota share and surplus is that the proportion of the sum insured under the policy that is reinsured will vary from risk to risk, depending on the size of the sum insured under the policy. The same retention level will apply for all business covered under the treaty that is either amended or abolished.

Answer 4

Surplus cover enables an insurer to write larger risks, which might otherwise be beyond its surplus cover. The main value of this type of reinsurance, however, is to enable the insurer to limit its exposure for the policies covered, so the insurer selects a monetary limit at the outset of the treaty and reinsures the amount of any policy sum insured above this amount.

Answer 5

Non-proportional reinsurance can be used to spread risk and to reduce pro-rata the size of risk retained. However, this does not cap the cost of any large claims that occasionally occur under PMI policies. Under excess of loss (XoL) reinsurance, on the other hand, the cost to an insurer of a large claim is capped with the liability above a certain level, often called the 'lower limit', or retention, being passed to a reinsurer.

Answer 6

With non-proportional reinsurance: The lower limit might operate on individual claims, for example, to cover against large individual risks, or on aggregations of claims, for example, to cover against large disease outbreaks. There might also be an upper limit, above which the reinsurer's liability ends. The reinsurer might pay for all claims within the limits or perhaps a proportion of the claims within the limits, for example, 90%. This could also be expressed as having a deductible of 10%. The limits might be linked to inflation. Non-proportional reinsurance is unlikely to be found in long-term insurances where the size of the benefit, or sum insured is at the outset.

Answer 7

The main purpose of any form of XoL reinsurance is to permit an insurer to accept risks that could lead to large claims. Large risks here have large relative to the insurer's free assets or premium income. Other purposes are to reduce the risk of insolvency from a catastrophe, a large claim, or an aggregation of claims, and to stabilise the technical results of the insurer by reducing claims fluctuations.

Answer 8

In its simplest form, XoL reinsurance agrees to indemnify the cedant for the amount of any loss above a stated excess point. Usually, the reinsurer will give cover up to a stated upper limit, with the insurer funding further layers of XoL cover, which stack on top of the primary layer from different reinsurers. The higher layer cover(s) come into operation on any particular loss only when the lower layer cover has been fully used, or 'burnt through'.

Answer 9

There are three main types of XoL reinsurance: * Risk XoL * Aggregate XoL (also called stop loss) * Catastrophe XoL (rarely appropriate for health covers)

Answer 10

Risk excess of loss (Risk XoL) is a type of XoL reinsurance that relates to individual portfolios where only one large individual loss occurs sometimes. Aggregate excess of loss (Aggregate XoL) / stop loss reinsurance is an extension of risk XoL reinsurance. However, rather than operating on large individual claims, aggregate XoL reinsurance operates on the total amount of claims payable in any one year.

Answer 11

Catastrophe excess of loss (Catastrophe XoL): Cover may be defined in terms of a common cause or peril, or single event, over a particular period of time. Event-type cover is generally available. However, the risks associated with pandemic cover are very uncertain and so this cover is not normally available, at least not at an affordable price. This means that an insurer may be able to afford to purchase catastrophe XoL reinsurance to cover the risk of a chemical explosion event occurring, however, they are unlikely to be able to find affordable cover for the risk of a pandemic occurring.

Answer 12

Advantages of XoL to an insurer: * It protects against large and unexpected claims, thus providing greater security. * It can help to stabilise the insurer's financial results. It can increase the insurer's underwriting capacity, allowing it to accept larger risks. * It can provide cover for events that could threaten the insurer's solvency. Disadvantages of XoL: * As with all reinsurance, the insurer will pay a premium to the reinsurer which, in the long run, will be greater than the expected claims recovered under the treaty. * From time to time, XoL premiums can be considerably greater than the pure risk premium for the cover.

Answer 13

A wide variety of FinRe contracts have been developed and used, although all were devised primarily as a means of improving the apparent accounting or supervisory solvency position of the cedant.

Answer 14

Rather than transferring insurance risk, which is the aim of traditional reinsurance, FinRe aims to manage the insurer's capital position.

Answer 15

The risk premium reinsurance method is one type of arrangement that has been associated with a financing arrangement. Hereby the reinsurer relieves the cedant of part of its new business financing requirement. The 'loan' received over a period is therefore equal to the total initial commissions payable under the arrangements over that period. As far as repayments are concerned, the company simply agrees to pay more for its reinsurance protection than it would normally have done.

Answer 16

You may see this type of FinRe referred to as surplus relief reinsurance. This alternative approach makes use of a loan in the creation of new business or existing business. The reinsurer again provides a loan to the cedant, but, as the repayment of the loan is contingent upon the stream of future profits being generated by the business, the cedant may not need to reserve for the repayment within its supervisory returns, depending on the regulatory regime.

Answer 17

To determine the retention level of loss, it is necessary first to estimate the statistical distribution of the risk experience costs of the portfolio on various assumed retention levels. The insurer then needs to judge how low a probability of events should be tolerated from the overall average risk costs. Another possible approach is to consider the total: The cost of financing reinsurance, and The cost of obtaining reinsurance. As the retention level increases, (a) and (b) will decrease, and a retention level can be determined that minimises the total (a) + (b).

Answer 18

Self-insurance occurs when a benefit arrangement sets up measures internally in order to mitigate the effects of a certain risk. Self-insurance can be applied to any type of risk.

Answer 19

A risk reserve account can be set up to finance the benefits payable. This type of reserve can be funded by a small addition to overall contributions or a reduction in the contribution towards benefit funding.

Answer 20

A solvency reserve can be established when the assets in a benefit arrangement exceed the liabilities. The presence of a solvency reserve reduces the level of security that the liabilities. Solvency reserves form a buffer against adverse experience and protect against the security of liabilities.

Answer 21

Insurance is a specific section to retirement arrangements. Purchasing insurance from a life office to protect against the risks associated with mortality and morbidity is common in both DB and DC contracts and with employer-offered risk benefits. Funds with a complex benefit design may not always be able to implement insurance that covers all of the benefits offered on death or disability.

Answer 22

The state also plays a role in this insurance. The ongoing ability of the state to raise funds via taxation forms a type of reinsurance to the benefits offered by the state.

Answer 23

Underwriting is the process of consideration of an insurance risk. This includes assessing whether the risk is acceptable and, if so, the appropriate premium, together with the terms and conditions of cover. As indicated, this tool is leveraged in the insurance setting where risk is borne by the benefit provider.

Answer 24

**Full medical underwriting** is the most onerous and detailed form of underwriting, where a full health assessment is performed before the policy is taken out and premium rate confirmed. **Medical history disregarded (MHD)**, at the other extreme, is MHD underwriting, under which no regard is paid to the individual's past medical history and no exclusions are made for PECs.

Answer 25

Another alternative is moratorium underwriting. No formal underwriting is carried out at the point of acceptance, but past medical history is examined at the time of claim. There are two defined periods that can relate to the moratorium approach: The applicant can claim for any condition other than those pre-existing in a defined period before acceptance (this effectively is an exclusion of all conditions that have received treatment in a defined period prior to application in the insurer. This first defined period can vary from 12 months up to 5 years. This exclusion is waived after a period of time if the policyholder receives no further treatment for the condition. If the policyholder has not received any treatment for a condition that was initially excluded during the moratorium under the 2 or 5 years after the start of the policy, that exclusion is removed.

Answer 26

Medical evidence can be obtained from the following sources: * Questions on the proposal form completed by the applicant. * Reports from medical doctors that the applicant has consulted, for example, a primary medical attendant's report (PMAR). * A medical examination carried out on the applicant at the request of the insurer, for example, an examination undertaken by a doctor or nurse appointed by the insurance company. * Specialist medical tests on the applicant, for example, an HIV test.

Answer 27

The underwriter is attempting to match the risk with the pricing assumptions and ultimately to ensure that a suitable premium is charged. An exclusion is a condition or circumstance that is specifically not covered by the policy. A moratorium is a waiting period during which certain pre-existing conditions are not covered, but may become covered after the moratorium period if certain criteria are met.

Answer 28

Medical underwriting can be used to manage risk in the following ways: It can protect an insurance company from anti-selection and in particular from lives whose health is so seriously impaired that it is impossible to assess the risk accurately. The medical underwriting process enables insurers to identify lives with substantial health risk for whom special terms must be quoted. Adequate risk classification within the underwriting process will help to ensure that all risks are rated fairly.

Answer 29

A key component of risk management lies in ensuring that the claims accepted are consistent with the assumptions made when the benefit was designed and priced.

Answer 30

The risk management methods used by PMI insurers to manage claims costs can be classified into three main categories: Methods aimed at policyholders Methods aimed at healthcare providers Care / utilisation management

Answer 31

Methods aimed at policyholders include: * Limitations and exclusions on benefits * Co-payments, levies, deductibles, and other forms of coinsurance (MSAs)

Answer 32

Methods aimed at healthcare providers include: * Treatment protocols * Negotiated fees and fixed payment methods

Answer 33

The accuracy of policy and claims data is a major risk for any benefit provider. Not only do policy / member data record necessary information for benefit payout, but both, in combination, will also provide the basis for policy experience against which future business is priced and current risks are reserved.

Answer 34

The accuracy of policy and claims data is a major risk for any benefit provider. Not only do policy / member data record necessary information for benefit payout, but both, in combination, will also provide the basis for policy experience against which future business is priced and current risks are reserved.

Answer 35

The auditing of the accuracy of information will entail the regular inspection of the data captured are comprehensive.

Answer 36

The software for accepting data input, for example, policyholder or member details, claims details, and agent particulars, should have inbuilt checks that prevent erroneous items from being accepted.

Answer 37

An individual policy or member record will have certain fields that are mandatory; the input will not be accepted unless all such information is included.

Answer 38

Staff training responsible for input is of the utmost importance, to establish a culture of the value of accuracy of data.

Answer 39

The salesperson, whether employed or independent, is often the front-line first contact between the benefit provider and the customer. The extent of this depends on whether benefits are provided through employment or are sought individually.

Answer 40

In order to protect its relationship with the customer, the benefit provider must: Monitor the sales message, Beware of business churning, Analyse the quality of sales staff, Beware of overgenerous commission, Monitor premium receipts, and Invest in sales training.

Answer 41

Salespeople should not be encouraging policyholders or members to lapse policies with a view to taking out others, with the same or a different benefit provider, thus undergoing a second set of initial charges.

Answer 42

Key aspects include: * The record of sales agents should be analysed for volumes written and for persistency * Complaints against, and compliments about, each agent should be reviewed

Answer 43

* Commission should be commensurate with the policy loadings, which means the loading for commission in the premium is consistent with that actually paid. * Commission levels should not introduce product bias. Commission should not encourage over-selling. * Commission should be matched with clawback controls on early lapse.

Answer 44

Premiums or contributions should be received from agents / brokers in a timely manner. Policies should not be issued without evidence of premium receipt.

Answer 45

Salespeople and sales support staff should be adequately trained on sales processes, including the need to obtain robust information on customers' health and care insurance needs and their ability to pay. Salespeople and sales support staff should be adequately trained on products and acceptance procedures, such as medical underwriting procedures.

Answer 46

Treating customers fairly (TCF).

Answer 47

This can be achieved by: * The risk of not treating customers fairly can be mitigated in several ways. * The insurer should avoid promising more than the scope of the benefit, making all product discussions clear and explicit, and monitoring sales processes accordingly. * This monitoring should ensure that customers' expectations are being kept with the policies provide. * Surveys on customer service satisfaction. * Understanding what has been bought. * Meeting needs. * Information and literature. * Claims payment satisfaction.

Answer 48

Techniques for managing counterparty risk include: Thorough due diligence on the counterparty before selection. Due diligence involves an investigation of the counterparty prior to signing a contract. Diversification across different counterparties. Simple counterparty exposure limits. Restriction on the use of counterparties below a specified credit rating. Credit insurance or derivatives.

Answer 49

Once the third party is chosen, a service level agreement will be put in place. In return for cheaper fees, unit costs or periodic payments, certain tasks will be performed to a pre-specified standard and within pre-specified times. For example, for a third party performing underwriting on behalf of a health and care insurer will need to report in respect of: Time taken to underwrite cases. The proportion of customer accepted, declined and rated. The quality of customer satisfaction.

Answer 50

Enterprise risk management (ERM) is a risk management framework that considers the risks of the business as a whole, rather than considering individual risks in isolation.

Answer 51

Such analyses can help the insurer to identify the appropriate risk management actions, such as: Expense controls. Policy retention activity. Reviewing new business strategy. Asset-liability management. Capital management.

Answer 52

Relating to the above section, benefit arrangement providers are able to take advantage of technical developments in the analysis of large volumes of data or 'big data'.

Answer 53

The successful performance of a business is down in large measure to the quality of the staff employed and their exercise of judgement.

Answer 54

Companies may perform an occasional audit of staff competence.