28. Reinsurance

Question 1

Reasons for reinsurance

Answer 1

I LAPSE

• Increase capacity to write risk – this helps insurer write a variety of business, or larger risks than it would otherwise be happy to accept, allows entry into niche markets, groups versus individual
• Limit exposure to risks – if the book of business is new to writing this type of risk, they may want to limit their exposure initially to each risk; or on the overall book – via stop loss/ aggregate XoL – any changes in burden of disease may mean greater uncertainty for the insurer and so they may wish to limit the risk through reinsurance
• Avoid large single losses – may be due to increased burden of disease or new technology which may influence claim trends
• Provide financial assistance – e.g. reinsurance commissions
• Smooth results – although the insurer is large, the CI book could be small, means higher variability in experience
• Expertise – especially if new to market of significant market changes
• New business funding
• Diversification
• Improve standing in market

Question 2

Factors affecting insurer appetite for reinsurance

Answer 2

• Size of insurer
• Experience in the marketplace
• Size of its portfolio (credibility factor)
• Degree to which felt the business outcome is predictable within bounds (risk appetite)
• Reinsurer supply

Question 3

Advantages of Quota Share to insurer

Answer 3

• help to spread risk, reduce parameter risk in particular
• encourage reciprocal business
• write large portfolios
• used for financing new business
• administratively simple

Question 4

Factors affecting insurer appetite for individual (risk) XL reinsurance

Answer 4

1. Volatility of claims with heterogeneous risks
2. Significance of extreme claims on financials
3. Free assets available to absorb volatility
4. Availability of XL reinsurance in the market
5. Costs of reinsurance, as well as credit risk taken on.
6. Predictability of experience / Credibility and Stability of past experience
7. Expertise in reinsurer’s claims management
8. Not much scope for solvency/tax arbitrage

Question 5

Reinsurance impact on pricing - how reinsurer can impact on day-to-day management of product development and profitability

Answer 5

• technical assistance in data provision and pricing basis (particularly important if new product)
• risk sharing and limit overall exposure
• smoothing profitability
• providing financing to support new business strain
• tax arbitrage where reinsurer taxed on different basis from insurer
• solvency capital arbitrage - where reinsurer holds less capital per unit of risk
• enable insurer to accept larger risks