Ch 29 + 30: Reinsurance

Question 1

Types of reinsurance contracts

Answer 1

Proportional
- Co-insurance, under QS or Individual Surplus
- Level risk premium, under QS or Individual Surplus
- Risk premium reinsurance, under QS or Individual Surplus

Non-proportional
- Excess of loss: Individual, Aggregate, Stop Loss, Catastrophe

Financial reinsurance

Facultative and obligatory reinsurance

Question 2

Examples of exclusions on catastrophe reinsurance contract

Answer 2

Wars
Terrorism
Epidemic
Nuclear risks

Question 3

Factors to consider when choosing reinsurance programme

Answer 3

Cost of reinsurance
Type of reinsurance needed vs ones available
Risks insurer will face
Limits (retention limit)

Question 4

Factors to consider when setting retention limits

Answer 4

Benefit level: average benefit/claims level of product and expected distribution of benefit

Risk appetite: company’s insurance risk appetite  need to balance counterparty risk with insurance risk

I – (blank)

Free assets: Level of free assets of company and importance of free assets ratio

Terms of reinsurance: the reinsurance terms that can be offered to cedant and dependence of the terms on retention limit

Capital requirements: effect on regulatory capital requirement of increasing/decreasing retention limit

Underwriting: level of experience company has in underwriting products/business that is in question

Retentions: company’s retention on other products

Profit-sharing: existence of profit-sharing arrangements in treaty

Sum assured increases: nature of future increases in sum assured

Credit rating - impact of retention limits on credit rating

Regulation: limits regarding retention and any minimum required level

Question 5

Reasons cedant would reinsure their business

Answer 5

New business strain ( to reduce this)

O-nothing

Technical assistance ( to receive this)

Separate out different risks from a product to allow for optimal capital management

Capital requirements: to reduce this

Risk costs: Reinsurer can price risk at a lower cost than cedant due to different capital requirements, diversification benefits, different taxation, different assessments of risk

Aggregation of risk ( to allow for this) that cedant cant manage on its own

Profits ( to increase this)

Limit
 Amount paid for a single claim
 Aggregate claims pay-out

Insurance parameter risk ( to reduce this)

Volatility of claims pay-out ( to reduce this)

E – nothing

Question 6

Methods that can be used to determine retention limits

Answer 6

o Stochastic simulations
o Stochastic simulation – reinsurance with fluctuations reserve
o Financial economics approach