29. Reinsurance I Flashcards
What is reinsurance?
Arrangementw ehre one party (reinsurer) agrees to indemnify another party (insurer) against part or all of the liability assumed by cedant under one or more insurance policies or reinsurance contracts in exchange for a premium.
What are the types of reinsurance contracts
- Original terms
- Risk premium
- Excess of loss
- cat cover
- stop loss
- Fin re
- Fac vs Obligatory
Describe co-insurance on original terms
- Cedant sets premium and reinsurance premium is proportional to it
- Price of reinsurance agreement is set by amount of commission agreed with the reinsurer
- Commission usually signifcant
- Insurer and reinsurer share all aspects of original contract
Describe co-insurance using risk premium
- Reinsurer sets premium for its share of risk based on full sum assured
- Insurer calcs own premiums based on reinsurance premiums it will pay
- Reinsurance commission not significant
Describe risk premium reinsurance
- Reinsurer sets premium for its share of risk based on full sum assured
- Reinsurance premium acts as a recurring single premium, each premium covers immediate period of risk.
- Reinsurer may cover:
- Part of sum assured
- Full sum assured
- Sum at risk
- Risk premiums will change each period because of:
- Changing sum at risk
- Ph age
- Rate reviews
- Reinsurance commission not significant
How can the reinsured amount be specified?
- Individual surplus
- Quota share
Describe XL reinsurance
Risk basis:
* Reinsurer pay any loss on individual risk in excess of pre-determined retention
* Usually if claim amount is unknown
Occurence basis:
* Paid if aggregate loss from any occurance of an event exceeds predetermined retrention
Can be organised in layers or across different lines.
Diff reinsurers can take diff prop of each line.
What are the types of XL reinsurance?
- Cat cover
- Stop loss
Describe cat cover
- Aims to reduce potential loss to insurer from non-independent risks insured
- Usually yearly and renegotiated each year
- Reinsurer pays if “catastrophe” defined in contract happens
- No std definition for catastrohe, e.g. min number of lives dying from single incident within specified time
- Contract will specify how much reinsurer pays
- Subject to a maximum amount reinsuer will pay
- May exclude risks like war, epidemics and nuclear risks
Describe stop loss
- Reinsurer pays aggregate net loss over predetermined retention for a portfolio over a given period, usually a year.
What are the features of fin re?
- Means to improve apparent accounting or solvency position of cedant
- Involves little or no risk transfer
- Not effective under accounting and supervisory regimes where credit can be taken for future profits and/or realistic liability must be held for loans
- Types of arrangements:
- Risk premium
- Contingent loan
Describe risk premium fin re
- Aim: Relieve insurer for part of its new business financing requirement
- “Loan” is presented as reinsurance commission related to volume of business reinsured.
- “Repayment” spread over number of years and added to reinsurance prmiums
- Insurer accounts expected lapse experience of portfolio when determining repayments
What is a contingent loan?
- Reinsurer provdes loan to cedant
- Repayment is dependent upon stream of future profits being generated by business
- Cedant may not have to reserve for repayment in supervisory returns depending on regulation
What is facultative reinsurance
- For insurer: free to place reinsurance within any reinsurer
- For reinsurer, free to accept of reject cover
- Both or one party may have a facultative agreement
What is obligatory reinsurance
*For insurer: must place business with reinsurer
* For reinsurer: must accept cover
* Could apply to one or both
