Ch 10 Reinsurance Flashcards
What is reinsurance
Contractual arrangement under which an insurer secures cover from a reinsurer for potential losses to which it is exposed under insurance policies it has issued
Why do insurers need reinsurance
To smooth claims experience
To limit large losses
To access the reinsurers expertise
Explain how it smooths claims experience
Use risk pooling to reduce the volatility of claims. Allows for a more predictable claims experience. This will allow for lower reserve requirements and then have more capital available for use
Explain how it limits large losses
Helps protect insurer from becoming insolvent as a result of large losses. Allows insurers to write policies for risks that are too large for it to handle alone.
Explain how reinsurers expertise is valuable
Their experience and skills in pricing and assessing of large risks. Their data is valuable for pricing and underwriting
Explain retrocession
This is reinsurance for reinsurers
Key terms - retrocession agreement
Retrocedant = ceding reinsurer
Retrocessionaire = reinsurer takes on risk
What are the two ways of writing reinsurance business
Treaty and facultative
What is treaty reinsurance
A contract made which clearly state how every insurance policy should be handled throughout the year.
What are the advantages of treaty reinsurance
Risks are reinsured automatically
Insurer knows that reinsurance will be available if the risk falls within the limits of the treaty and they know the terms of reinsurance agreement for such risks
Insurer can issue new policies instantly without having to find a reinsurer who is willing to accept risk
What are the disadvantages of treaty reinsurance
Once the treaty is up both parties must operate within the teams
Insurer is bound to pay premiums and only specific types of risks outlined in the treaty will be reinsured automatically . If not in the treaty terms would have to be negotiated
Terms of reinsurance treaty are agreed at the outset and the insurer may find that they are paying too much for reinsurance cover or reinsurer charging too little.
Explain facultative reinsurance
Less specific contract where the reinsurer decides whether they would provide cover for certain risk depending on the risk. There are no terms agreed beforehand
Advantages of facultative
Provides insurer with flexibility and choice
Insurer is under no obligation to use a particular reinsurer.
Disadvantages of facultative
Time consuming and costly to negotiate terms for a risk
Insurer doesn’t have certainty whether cover for a risk is available when it needs to be
Price and terms might not be acceptable
Insurers might not accept large risks as they won’t have cover secured
What are two types of reinsurance
proportional and non proportional
Types of proportional reinsurance
Quota share
Individual surplus
What is quota share
Proportion of each risk is agreed upon prior where the reinsurer will take on that risk
What is individual surplus
Where the proportion depends on the risk taken
What is quota share limit
Maximum amount reinsurer will pay
What is estimated maximum loss
How much is expected to pay out for a claim
What is a retention limit
Maximum amount insurer is willing to pay for a claim
T or F : if claim is below retention limit the insurer pays 100% of the claim
True
Retention % calculation
Retention limit / EML
Ceded risk calculation
EML-Retention limit/EML
What is the disadvantage of individual surplus
Claim is not capped at the retention level therefore insurers could be exposed to unlimited risk
Types of non proportional reinsurance
Risk XL
aggregate XL
What is Risk XL
Cost of any claim to an insurer capped at the excess point, above that point is paid by reinsurer
What is the upper limit in Risk XL
The cap for reinsurers and anything above that is paid by insurer
What is Aggregate XL
This is an agreement made for total amount claimed where the reinsurer is expected to pay aggregated claims over a specified period
What are different way claims can be aggregated
Event - such as catastrophe XL
Cause - such as perils
Class of business - claims on a certain type of policy or policies (STOP LOSS)
