CH 11 MANGING EXPOSURE Flashcards
If an insurer experiences higher profits in a particular class of b’ness what will the insurer want
Insurer and it’s re insurers will want to increase investment in that class to accept more business
As insurers are experiencing increase in investments as the market wide capacity increases, what will happen to the premium rates
The premium rates are reduced as insurers are trying to maintain the market share and underwrite more new business risk
Eventually what factors will affect underwriting profits from the reduced premium rates to maintain market share
The rising of the claims cost will lead to claims inflation, this plus a reduced premium rate will affect underwriting profits
When is the market said to be softening
When the rates are reducing
When is the market said to be hardening
When the rates are increasing
What is the length of the market cycle
It’s difficult to identify but it varies from 2-5 years
Which class of insurance has a more frequent hardening and less frequent hardening of the market
Motor Insurance has the most frequent and property insurance has the least frequent
From a risks perspective, cycles can shortened but not exclusively by
- Major disasters like hurricanes or terrorism acts
- Weather-related incidents
- Amendments to legislation
- More onerous legislation
How do economic issue drive the insurance market cycle too
Insurers are major investors in the financial market and so the impact of their returns from such activities can have an effect on their own profitability
If the returns are not forth coming then emphasis is place on
Greater emphasis is placed on their underwriters result that may drive a requirement to apply increased rates
Loss exposure can arise from
- Single Risk
- Single event
Single Risk will depend on
It will depend on whether the business written is property or liability
Calculating the maximum exposure of any one risk involves
It involves assessing the estimated maximum loss (EML) which is likely to occur
Why must EML be accurate
For it to have any purpose it needs to be accurate. As it has an important reinsurance implication
Who plays an important role in helping identify the estimated maximum loss
The risk Surveyor and its vital for them have an effective communication with the underwriter, so that all aspects of the risks in question are understood
If the Estimated Maximum loss is greater than the insurer’s acceptability, what options does the insurer have
The insurer will have two either to
- Purchase reinsurance so that it can write 100% of the risk
- It could take a proportion of the risk and co- insurance would be arranged
A single risk for risk accumulation is divided into
- Property and Business Interruption Risk
2. Liability Risks
For Single event resulting to an accumulation of risk what must insurers do
A threat of catastrophe is a phenomenon that insurers have to accept as part of their business, they must seek financial stability that catastrophe reinsurance protection can offer
What is Reinsurance
This is the sharing of risk,an insurance effected by an insurer against claims incurred under contract of insurance written by the insurer
Why do underwriters seek reinsurance
- -protect the account against a large single event
- protection the account against a large claim on a single item
- protect the company capital
- protect against fluctuating claims cost from year to year
- operational capacity
- entering a new market
- building up the account
- minimizing loss impact on income generated
- underwriters peace of mind
- sharing heavy/hazardous risk
Even with reinsurance an underwriter should always bear in mind that
They should bear in mind that they are legally bound to pay for losses arising before seeking their indemnity through re insurers
How many types of re insurers are there
There are two types of reinsurance
- Proportional
- Non Proportional
What is proportional reinsurance
The re insurer accepts an agreed share of risk to be ceded(put forward for reinsurance) and pays any loss incurred on the same basis
How many groups can proportional reinsurance be divided into
It can be divided into quota share and surplus
What does quota share reinsurance deals with
Quota share reinsurance an agreed proportion of all insurance written by an insurer will fall within the treaty
what are the advantages of quota share reinsurance
It is very easy to administer, re insurer will accept its proportion as soon as the b’ness is written
what are the disadvantages of quota share reinsurance
The insurer must pay the re insurer premium for risks ti could retain for its own account
Who uses quota share reinsurance
This form is utilized by new insurance company or where an existing company is embarking on a new class of insurance
What is Surplus reinsurance
Insurer only re insurers those risks where the sum insured exceeds their own retention limit
What is an insurer own retention limit also known as
Line
What is the formula for reinsurance Surplus
Sum insured in excess of the insurer’s retention limit/ Total Sum insured
What is non proportional reinsurance
This type of reinsurance where re insurer agrees to contribute to loses exceed specific figure for a premium negotiated with the insurer
Non-Proportional reinsurance can be divided into
Excess of loss and stop loss
Stop Loss is also known as
Excess of loss ratio
Excess of loss can be written on what basis
- Per risk Basis
- Per event Basis
Excess of loss per risk basis reinsurance is arranged in
Its arranged in layers
on Excess of loss per event basis re insurers liability is based on
Its based on the total losses incurred by the insurer due to the occurrence of one event
Stop Loss reinsurance the insurer is concerned with
The insurer is primarily concerned with protecting its loss ratio
Stop Loss ratio reinsurance is taken
Its taken by the insurer when they want to prevent the maximum loss ratio from exceeding a specific percentage
