29 Types of reinsurance Flashcards
1
Q
Definition
Reinsurance
A
- arrangement whereby one party (the reinsurer),
- in consideration for a premium,
- agrees to indemnify another party (the cedant)
- against part or all of the liability assumed by the cedant
- under one or more insurance policies,
- or under one or more reinsurance contracts
2
Q
The main types of reinsurance contract
A
- Original terms (proportional)
- risk premium (proportional)
- XL: catastrophe and stop loss (non-proportional)
- financial reinsurance
- facultative/obligatory
3
Q
Original terms (coinsurance) reinsurance
A
- sharing of all aspects of the original contract
- Premiums and claims are split in the same fixed proportion
- cedant will provide the reinsurance company with the premium rates it is using for the particular class of business it wishes to reinsure
- Reinsurer will determine the rates of reinsurance commission it is prepared to pay to the cedant for the business
- level risk premium reinsurance: the reinsurer supplies the cedant with a set of premium rates upon which the cedant can load its costs and profit test against the intended retail rates. premiums and claims aren’t shared in a single fixed proportion
- Two types:
- Individual surplus, reinsured amount is the excess of the original benefit over the cedant’s retention limit on any individual life
- quota share – a specified percentage of each policy is reinsured
- mixture of the above, retaining for itself a percentage of each policy up to a maximum retention
4
Q
Why is the level risk premium approach more common?
A
- Competition in markets dirve the price down
- too thin margins will make business unprofitable, even for reinsurers
- reinsurance protection increasingly difficult to obtain
- so insurers increase premiums to satisy reinsurers
- this is significant constraint on insurers pricing strategy
- Level risk premium approach:
- insurer and reinsurers rates are separated
- simlifying the pricing process
- insurer can still price more keenly, while obtaining reinsurance on the reinsurer’s terms
- knowing reinsurers premium rates in advance, insurer can price with full information.
- competition within reinsurance market ensurer that their rates are keenly priced in the first place.
5
Q
Risk premium reinsurance
A
- cedant reinsures part of the sum assured or the sum at risk, ie the excess of the benefit payable over the reserve,
- on the reinsurer’s risk premium basis,
- which can be annually renewable or guaranteed
- risk premium = probability of claim over the coming year * amount of benefit covered by the reinsurer
- reinsurer determines its risk premium rates by assessing the likely experience of the business it is to reinsure and then adding expense and profit margins
- Where the sum at risk is used, the reserves used to work out the sum at risk will be specified in the reinsurance treaty.
- Whole life and endowment = sum at risk
- term = full sum assured (reserves are small and advantages of the sum-at-risk basis would not justify the extra hassle involved)
- part to be reinsured can be on an individual surplus or a quota share basis
6
Q
Why do risk premiums change each year?
A
- sum at risk is likely to have changed over the period
- The risk premium rate (ie premium per £ of reinsured benefit) will change because it will be based on the (older) age of the policyholder
- risk premiums may change as a result of the reinsurer carrying out a pricing review
7
Q
Excess of loss reinsurance
A
- Can be enacted on a risk basis or occurrence basis
- risk basis: reinsurer pays any loss on an individual risk in excess of a predetermined retention
- Occurrence basis: the aggregate loss from any one occurrence of an event exceeds the predetermined retention.
- contracts last one year and need to be renegotiated each year
- insurer will pay a risk premium to cover the reinsurer’s expected loss, allowing for expenses and profit margins
- premium basis will include margins to reflect the uncertainty
- non-proportional reinsurance, because the reinsurance premiums paid are not in proportion to the actual claim amount paid by the reinsurer
- organised into different levels, or lines
- Different reinsurers may then take different proportions of each line
- multiple lines of excess of loss reinsurance are mainly found for group life policies.
8
Q
Excess of loss reinsurance
Catastrophe reinsurance
A
- aim: to reduce the potential loss to the cedant due to any non-independence of the risks insured
- The cover is usually only available on a yearly basis and must be renegotiated each year.
- Advantages: will allow the reinsurer to vary premiums if it is felt that the risk posed by the direct writer’s portfolio has changed. freedom will result in lower rates (adv to insurer). Insurer can also shop arround different reinsurers
- Reinsurer: agree to pay out if a “catastrophe”, as defined in the reinsurance contract, occurs
- no standard definition of what constitutes a catastrophe
- to qualify there needs to be a minimum number deaths from a single incident with the deaths occurring within a specified time of that incident
- contract will also specify how much the reinsuring company will pay if a catastrophe occurs
- the excess of the total claim amount, net of any amounts already reinsured, over the cedant’s catastrophe retention limit
- reinsuring company’s liability in respect of a single catastrophe claim would be subject to a maximum amount
- also usually a maximum amount of cover per life
- usually exclude certain risks such as war risks, epidemics and nuclear risks
9
Q
Excess of loss reinsurance
Stop loss reinsurance
A
- reinsurer pays the aggregate net loss over the predetermined retention for a portfolio over a given time period, usually a year
- portfolio’s loss to the cedant in any period is capped
10
Q
Financial reinsurance
Features and types
A
Features:
- means of improving the apparent accounting or supervisory solvency position of the cedant
- tends to involve only a small element, if any, of transfer of insurance risk from the cedant to the reinsurer.
- not effective under accounting or supervisory regimes where credit can already be taken for the future profits
- not effective where a realistic liability has to be held in respect of the loan repayments
Types:
- Risk premium financial reinsurance
- contingent loan
11
Q
Financial reinsurance
Risk premium reinsurance
A
- the reinsurer relieves the cedant of part of its new business financing requirement
- straightforward loan from the reinsurer would not achieve this, as the cedant would usually have to add the amount of the loan to its liabilities.
- “loan” is usually presented as a reinsurance commission related to the volume of business reinsured
- The “repayments” – spread over a number of years – are added to the reinsurance premiums
12
Q
Financial reinsurance
Contingent loan
A
- makes use of the future profits contained in a block of new or existing business.
- Assets set aside for reserves and solvency capital are in excess of realistic value of liabilities
- Over time this excess is expected to be returned to the company as profit
- reinsurer again provides a loan to the cedant,
- 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)
13
Q
Facultative and obligatory reinsurance
A
- cedant is free to place the reinsurance with any reinsurer
- so far as the reinsurer is concerned, facultative means that it may accept or reject the reinsurance offered.
- “obligatory” indicates the removal of this freedom of action.
- (a)facultative/facultative: direct writer can choose whether or not to reinsure the risk/ reinsurer has choice whether accept the risk
- (b) facultative/obligatory: direct writer can choose whether or not to reinsure the risk; the reinsurer is obliged to accept the risk if the direct writer decides to cede it.
- (c) obligatory/obligatory
- (b) and (c) agreements will be formalised in a treaty between the two parties
- (a) agreement might not be, though to avoid having to make up treaty documents at the time these may be prepared in advance
- The great advantage of treaties where the reinsurer’s acceptance is obligatory is that the direct writer can write large policies without having to refer back to the reinsurer – a process which might impede the sale of such policies due to the delay in acceptance, quite apart from the associated administrative hassle.
