30. Reinsurance II

Question 1

List the reasons for reinsuring

Answer 1

• Limit amount paid on a particular claim
• Limit total claims payout
• Reduce insuranve parameter risk
• Reduce claim payout fluctuations
• Receive technical assistance
• Reduce new business strain
• Reduce overall capital requirements by using reinsurer’s capital. Reinusrers have lower capital req due to risk diversification and regulatory position. This can lead to lower capital requirements for industry and lower reinsurance prices.
• Separate out different risks from a product. E.g an immediate annuity contains primarily investment and longevity risks. Reinsureance can disaggregate risks allowing cedant to optimise its risk management and capital requirements
• Allow aggregation of risks cedant can’t manage on its own, so allowing manufacture of product lines
• Raise capital

Question 2

Why might the variance of claim payouts be high relative to the mean payouts?

Answer 2

• Small # of contracts with high sums assured
• Lives insured not independent risks

Question 3

What considerations must a company take when choosing reinsurance?

Answer 3

• Cost of reinsurance
• Retention limit
• Counterparty risk
• Legal risks
• Type of reinsurance

Question 4

Which factors must cedant take into account when setting retention limit?

Answer 4

• Average benefit level for product and expected distribution of benefit
• Company’s risk appetite
• Level of free assets and importance attached to stability of free asset ratio
• Terms on which reinsurance can be obtained and dependence of the terms on the retention limit
• Level of familiarity with uw the type of business involved
• Effect on regulatiry capital requirements of increasing/reducing retention limit
• Retention on other products
• Nature of future benefit increases

Question 5

What are the approaches insurer can take to set retention limit?

Answer 5

• Stochastic simulation- reinsurance only
• Stochastic simulation- reinsurance and fluctuations reserve
• Financial economics approach

Question 6

Explain how retention limit would be set using stochastic simulations (reinsurance only)

Answer 6

1. Can either:
   * Aim to set retention limit at a level that keeps ruin probability below specified level.
   * Aim for probability that loss in a period doesn’t exceed earnings of business
2. Use stochastic model to project claim rates and value of A and L
3. Can use simulation to determine retention level st company stays solvent or earnings stay above certain level for say 995/100o runs

Question 7

Explain how retention limit would be set using stochastic simulations (reinsurance and fluctuations reserve)

Answer 7

1. Consider total of:
   a. Cost of financing appropriate mortality fluctuation reserve
   b. Cost of reinsurance
2. As retention limit increases, a increeases and b decreases
3. Can set retention limit minimising a+b
4. To calc a, use simulations to determine reserves company must hold (project claims, A and L)

Question 8

Explain how retention limit would be set using financial economics approach

Answer 8

• Use efficient investment frontiers
• Looks at reinsurance as asset class allowing firm to optimise its risk and reward trade-off
• Can identify reinsurance arrangement that can’t be bettered in terms of reducing risk for reduction in return or increasing return with no increase in risk

Question 9

What is a deposit back?

Answer 9

• Used to manage counterparty risk
• Reunsurer deposits back its share of total reserve under reinsured contract with insurer

Question 10

What does the type of reinsurance chosen depend on?

Answer 10

• Reason for reinsurance
• Cost
• Type of business
• Legal conditions applying
• Cover available in markey

Question 11

What type of reinsurance agreement would new unit-linked company with limited capital use?

Answer 11

• Risk premium with financing commission to reduce new business strain (if effective in regulatory regime)
• Quota share
• Low retention individual surplus

Question 12

What type of reinsurance agreement would large established mutual with w/profits use?

Answer 12

• Might not buy reinsurance
• Risk premium reinsurance with no financing commission and high retention limit (if don’t want to reduce bonuses because of worsened mortality experience)
• Cat cover

Question 13

What type of reinsurance agreement would large company expanding quickly with declining free assets use?

Answer 13

• Fin re
• Risk premium with financing requiremnt with retention that will reduce new business strain without giving too much profit to reinusrer
• Cat cover
• Stop loss or other fin re to reduce capital employed and increase ROC

Question 14

What type of reinsurance agreement would company writing group business use?

Answer 14

• Cat cover
• Individual surplus with high retention on risk premium basis if large
• Quota share if small