3 Reinsurance Flashcards
Why insurers buy reinsurance?
Risk transfer
Peace of mind
Balancing peaks and troughs
Releasing capacity
Why firms sell reinsurance?
Accessing business not otherwise available (licensing)
Try out a class of business on a trial basis
Pure business preference (Munich re/Swiss re)
2 types of reinsurance
Fac - single situation, one risk
Treaty - portfolio
Full follow clause
what are the caveats
Insurer makes claims decisions, doesn’t even have to inform the reinsurer, reinsurer just pays
caveats
Ex gratia settlement/paying claim on goodwill. If not included in cover, reinsurer can decline to reimburse
if reinsurer argues settlement wasn’t made within T&Cs of policy
Claims coop clause
Insurer keeps reinsurer appraised of loss scenario but doesn’t have rights to intervene
Claims control clause
Reinsurers preferred option
Reinsurer has full decision making
Cede
The Insurer risk sharing w reinsurer
Cession
Share of risk passed to reinsurer
Collecting note
Doc used to present claim for XoL reinsurance, can be supported by a bordereaux
Non proportional r/i
Premium & claims don’t have a direct correlation. Premium set in direct portion, claims dealt with on financial basis. XoL and stop loss an eg for this
Proportional reinsurance
Claims shared between insurer and reinsurer in pre-agreed % portions. Surplus treat and Quota share
Reinstatement
In non proportional r/i, a layer can be restated with additional premium subject to a cap on how many times losses are paid. Brings policy back to life.
Reinstatement premium
Premium paid for reinstatement layer
Fac meaning
Optional, not compulsory
Why buy fac
You can buy for certain perils (eg for cat, earthquakes). Only responds to one risk.
Lower layers
Higher layers
Working layers - more expensive. More likely to have claims.
Catastrophe layers - cheaper
Combined ratio
% of premium income represented by claims and operating costs (+ cost of r/i). As long as lower than 100%, insurer is making a profit.
Loss ratio
% claims vs premium
Stop loss r/i
Structured in layers (XoL). Stop loss cover protects insurers in event of loss (operating expenses > premium). Triggered when insurers combined ratio exceeds certain point
Benefit of QS for reinsurer
Everything shared so insurer can’t negatively select (opposite to fac obligatory ri)
100% Qs also known as
Fronting arrangement (100% of risk)
Surplus lines treaty
More XoL
Buys a surplus line, usually has a max amount
Eg five line surplus treaty = five lines of £x each added to their retained line
Premium proportionally shared
Surplus treaty
Insurer covers % of limit so pays % of a claim
If a reinsurance claim, what steps first
- Does it fall under standard proportional r/i ? Or any fac r/i?
- Is there any non prop r/i? Eg XL
Government based reinsurance programmes
schemes ? Us/uk/France-australia
Providing terrorist related reinsurance cover for commercial market
USD - TRIA/TRIPRA - terrorism risk insurance act
Tripra 2015 - terrorism risk insurance program reauthorisation act of 2015 (&2019). Insurers pay then claim off of government
Uk- pool re
France - gareat
Australia - arpc
Flood insurance uk
Flood re scheme - every insurer offers home insurance pays into scheme so uk insurers can continue offering policyholders flood insurance but goV reinsurers flood element. Insurer pays then claims from fund
London reinsurance market
Major but not largest
Types of r/i
Fac, proportional treaty, non proportional treaty
Proportional r/i
Reinsurer shares risk in equal proportions up to cap
Proportional r/I types
QS, Surplus lines
XoL
Non prop - do not share claims/premiums in a proportion
Buy in layers
Stop loss r/i
Protects insurers loss ratio
Order of claim in r/i
Fac first
Proportional
Non proportional
How much Lloyd’s annual premium income is reinsurance business
35%
Fac obligatory reinsurance
Insurer can choose whether it wants to cede certain risks falling inside a set of criteria. Optional for insurer. Obligatory for reinsurer.
Unbalanced, negative selection
Non proportional reinsurance premium
Premium USD 100k adjustable at 5% where OGPI original gross premium income is USD 3m
USD 3m * 5% - USD 100k payable at end of policy
Proportional reinsurances
Premium that original insurer receives correlated to what reinsurers receive.
Quota share or surplus treaty reinsurance
30% QS means
30% of each risk, 30% of all premiums, 30% of all claims
100% QS otherwise called
fronting arrangement
Surplus lines treaty
Buying x amount of r/i cover over your retained line to write a risk
eg USD 30m line with USD 5m net retention you would buy a five-line surplus treaty
(USD 5 x 5 = USD 25m)
You don’t have to use all your lines eg if you wanted to just write USD 15m you could do USD 5m net + two of your five lines surplus for USD 10m. However premium shared proportionally so 1/3 + 2/3
Underwriter has 10 line surplus treaty with USD 1m net, and writes USD 6.25m. What claim % will reinsurers cover?
reinsurance = USD 5.25m
reinsurance = 5.25/6.25 = 84% of claims
why reinsurers interested what other reinsurance arrangements a pedant has
general rule the most specific or relevant reinsurance contract responds first
