Blanchard and Klann

Question 1

List the 6 principal functions of Re and the insurance program to consider

Answer 1

1 - Increase large line capacity
          (Surplus Share ProRata)
2 - Provide CAT protection
          (CAT Treaty)
3 - Stabilize loss xp
          (Aggregate XS of Loss)
4 - Provide surplus relief
          (QS)
5 - Facilitate withdrawal from a market segment
          (Prospective Re)
6 - Provide UW guidance
          (ProRata Re and rely on Re expertise)

Question 2

Facilitate withdrawal from a market segment

Surplus

Answer 2

• Assets decrease because of the cost of Re

- Less volatile if there are unexpectedly large/small losses during the runoff year

Question 3

Provide underwriting guidance

Explain impacts to the ceding company on the following

Answer 3

Conceptually equivalent to “Increase Large Line Capacity” wherein Re creates new business opportunities for the insurer. Impact on surplus and income will depend on the profitability and volume (after Re cessions) of the new business

Question 4

Facilitate withdrawal from a market segment

Loss reserves

Answer 4

Gross reserves are unchanged, but net reserves disappear

Question 5

Facilitate withdrawal from a market segment

Unearned Premiums

Answer 5

• Gross UEPR disappear over the year as the business runs off
• Net UEPR disappear immediately when the EUP is ceded

Question 6

Facilitate withdrawal from a market segment

Leverage ratios

Answer 6

• Net leverage ratios are zero
• Only remaining risk is Re collectability risk
• Surplus that was supporting the runoff business should now be free to support existing or new business

Question 7

Facilitate withdrawal from a market segment

Income statement

Answer 7

UW results reflect a profit because the ceding commission offsets expenses which were paid the previous year. This profit is slightly smaller than if the business had not been ceded. However, the risk in the results is now greatly reduced

Question 8

Increasing large line capacity

Surplus

Answer 8

• No impact on surplus other than earnings on additional business opportunities
• Given the additional premium, reserves and Re collectability risk, the ceding company may desire to hold more surplus to support these greater risks

Question 9

Increasing large line capacity

Loss reserves

Answer 9

Both gross and net loss reserves increase, partly due to increased premium volume and partly due to the nature of new business (slower dev)

Question 10

Increasing large line capacity

Unearned Premiums

Answer 10

Increase, but remain the same in proportion to premium

Question 11

Increasing large line capacity

Leverage ratios

Answer 11

• Net: Ratios increase slightly because of the change in business model
• Gross: Ratios begin to differ materially from net and Re leverage grows in importance due to the purchase of Re

Question 12

Increasing large line capacity

Income statement

Answer 12

Little changed on a net basis, but over time the riskier book and changing cost of Re may introduce greater volatility

Question 13

Providing CAT protection

Surplus

Answer 13

• If no CAT occurs, surplus decreased due to its cost

- But if CAT occurs, it will substantially mitigate its effect

Question 14

Providing CAT protection

Loss reserves

Answer 14

• If CAT occurs, gross loss reserves can increase significantly for a relatively short period of time
• As long as CAT losses are within the Re limit, net reserves will return to normal levels sooner than a grosss reserve as retained portion is paid first

Question 15

Providing CAT protection

Unearned Premiums

Answer 15

-Little to no change, as CAT Re is normally a limited portion of total premium

Question 16

Providing CAT protection

Leverage ratios

Answer 16

• If no CAT occurs, impact results from reduced surplus in the denominator of many leverage ratios
• If CAT occurs with Re, significant impact only on gross ratios

Question 17

Providing CAT protection

Income statement

Answer 17

• II is reduced by purchasing Re

- UW income is substantially protected

Question 18

Stabilize loss experience

Surplus

Answer 18

• Overall surplus lowered by net cost of Re

- But less period-to-period variation

Question 19

Stabilize loss experience

Loss reserves

Answer 19

Net reserves should be smaller, more stable, and easier to estimate

Question 20

Stabilize loss experience

Unearned Premiums

Answer 20

Reduced due to cost of Re

Question 21

Stabilize loss experience

Leverage ratios

Answer 21

More stable but slightly higher (due to reduced surplus)

Question 22

Stabilize loss experience

Income statement

Answer 22

Lower over time due to the net cost of Re, and II would be lower. But more stable

Question 23

Provide surplus relief

Surplus

Answer 23

Decrease because of the cost of the Re (Lower liabilities and UEPR)

Question 24

Provide surplus relief

Loss reserves

Answer 24

Net reserves are a fixed % of gross reserves

Question 25

Provide surplus relief

Unearned Premiums

Answer 25

Net reserves are a fixed % of gross reserves

Question 26

Provide surplus relief

Leverage ratios

Answer 26

Net leverage ratios are significantly improved, although ceded Re leverage ratios are significantly increased. Hence, the insurer’s solvency becomes more reliant on its Re solvency

Question 27

Provide surplus relief

Income statement

Answer 27

UW income proportional to QS and II is significantly reduced