CH 29 - 30 (Reinsurance) Flashcards
Coinsurance:
Original Terms
- Original premiums and benefits are proportionately shared
…quota or surplus options - Significant reinsurance commission
- -> Driver of the price
- Risks are fully shared
(incl. investment + lapse)
Coinsurance:
Level Risk Premium
- Level premiums rates set
(by reinsurer) - Cedant’s contract is priced by taking this into account
- Commission is less significant with this variation
- Premiums + claims not shared in single fixed proportion
(hence type of risk premium)
Risk Premium Insurance:
Recurring Single Premium
- Reinsurer sets rates
- Premium will better reflect the risk of claim over coming period
- Premiums change regularly (for immediate period of risk)
- May be guaranteed for policy duration
- Reinsurance benefits based on share of full sum assured or sum at risk
>full sum assured
(used where reserves are small + product is temporary)
or
>sum at risk
(relative to reserves – used where reserves are large) - All types possible
(Quota + Individual Surplus) - Commission usually not significant
- May have profit share arrangement
(where share of profits to reinsurer from portfolio are paid back to direct writer)
Types of Excess of Loss
Catastrophe Reinsurance:
> Shares in total claims above a threshold from multiple claims from a single event
Stop-Loss Reinsurance:
> Covers excess of all aggregate claims in a year over a threshold
(up to a maximum)
Definition of FinRe
- Designed as means of improving apparent accounting or supervisory solvency position of cedant
- Limited transfer of insurance risk
- Manage insurer’s capital position
- Can relieve part of new business financing requirement
Facultative vs Obligatory
Facultative = Freedom of Action (= Open relationship) > For insurer, can see other reinsurers > For reinsurer, free to accept/reject reinsurance offered
Obligatory
= Removal of freedom
(formalised in a treaty - less admin and permission required under treaty)
Combos:
- f/f
- f/o
- o/o
Methods of FinRe
- Risk premium reinsurance:
Loan = reinsurance commission
Repayments = added to reinsurance premium - Contingent loan
Loan = Capital lump sum
Repayments = share of VIF release
AKA surplus relief/asset enhancing reinsurance
Quota Share vs Individual Surplus
Quota Share:
> Constant fixed proportion
Individual Surplus:
> Maximum retention per life
Factors determining size of reinsurance commission
- Profit expected on business
- Risks to be taken on
- How much it wants to take on the business
(incl. reinsurer competitor level)
...all of which will be determined by: > Expected future mortality > Pricing basis uncertainty > Reinsurer's other expected expenses > Reinsurer's cost of capital > Reinsurer's profit criteria (incl. required return on capital) > Insurer's premium rates > Quality of insurer's underwriting > Expected persistency > Extent of commission recovery on lapse > Extent of profit sharing
Benefits of Reinsurance
--Limited large losses
(…
**reduced risk of Insolvency
**increased capacity to write Large risks
)
--reduced claims Volatility [correlation + volume]
(…
**Increased capacity to write more business
=> diversification
**Smoother profits/dividends
**reduced capital Requirements
)
--access to reinsurer Expertise
(…
**reduced Business risk
{from inappropriate assumptions}
**reduced Operational risk
{from transferring some activities to the reinsurer}
)
-- FinRe (capital relief)
** cost Efficiencies
** better Return on capital
** reduced capital Strain
--Risk Management
**Separate risks to optimize management and requirements
**reducing Parameter risk
**allow for risk Concentrations to be taken onAlternatives to Reinsurance
- Mortality fluctuation reserve
- Declining certain business
Factors for choosing retention limits
BAFTU PRIC
- expected distribution of Benefit levels
(average + variance) - risk Appetite
- Free asset levels
(+ importance of free asset ratio stability) - Terms of reinsurance
(link to retention limits) - Underwriting experience
- Profit-sharing arrangement
- Retention on other products
- nature of any future Increases in SA
- effect on Capital requirements
Pros to Deposits Back
INSURER:
- Reduced exposure to counter-party risks
- Greater assets to invest with (retain investment profits)
REINSURER:
- Cede investment risk for with-profits business
(on original terms)
- Avoid issues with investing in unfamiliar market
(if international)
Other aspects of Reinsurer Appeal
besides cost
- Financial strength
- Cover offered (breadth of offerings)
- Profit Sharing Arrangements
Commenting on Reinsurance Form
- Who set the price?
- How frequently does it change?
- Role of commission
- Which lines of reinsurance available?
- Full Sum Assured vs Sum at Risk
- Profit Sharing
