Ch 29: RE 1

Question 1

Reinsurance definition

Answer 1

Reinsurance is an arrangement whereby one party (the reinsurer) in consideration for a premium, agrees to indemnify another party (the cedant) against part or all of the liability assumed by the cedant under one pr more policies, or under one or more reinsurance contracts.

Question 2

Coinsurance on original terms reinsurance description

Answer 2

Original terms:
* Method involves sharing of all aspects of the original contract.
* Premiums and claims split in same fixed proportion
* Reinsurer shares in full the risks of the policy, including risks of investment and early lapse)
* Cedant provides the reinsurer with premium rates (retail rates) it is using for a particular class of business it wishes to reinsure.
* Reinsurer checks whether the cedant’s premium rates are adequate.
* Reinsurer will determine the reinsurance commission it is prepared to pay the cedant for the business - ultimately determining the cost of the reinsurance contract for the cedant.

Question 3

Coinsurance using level risk premium reinsurance description

Answer 3

• Reinsurer supplies the cedant with a set of premium rates upon which the cedant can load its costs and profit test against the intended retail rates
• In effect the reinsurer charges a level premium rate for its share of the risk
• Reinsurance commission is likely to be much less significant with this variation, as the reinsurance premium will probably have smaller margins than the retail rates.
• Applies mostly to protection products
• This approach is more common due to level of competition and ease of making frequent changes to rates.

Question 4

Risk premium reinsurance description

Answer 4

• The cedant reinsures part of the sum assured or the sum at risk, on the reinsurer’s risk premium basis, which can be annually renewable or guaranteed.
• RP(t) = q(x+t) x B(t)
• The risk premium operates as a recurring single premium, with each premium covering the immediate period of risk
• Risk premiums will vary from period to period due to changes in: Sum at risk, age of PH or as a result of rate reviews.
• Reinsurance commission is usually not significant.

Question 5

Specifying the amount to be reinsured.

Specifically for coinsurance and risk premium reinsurance

Answer 5

• For all three methods, the split between the reinsurer’s and insurer’s shares of the benefits can be specified using either quota share or individual surplus arrangements.
• For risk premium reinsurance the methods below can be applied to the full sum assured or the sum at risk.

Individual surplus:
* Reinsured amount is the excess of the original benefit over the cedant’s retention limit on any individual life.
* Fixed retention limit stays the same, but the percentage ceded will differ based on the sum assured.

Quota share:
* A specified percentage of each policy is reinsured.
* Same percentage is used for every policyholder.

Question 6

Excess of loss reinsurance description

Answer 6

Enacted on a risk basis, where the reinsurer pays any loss on an individual risk in excess of a predeterined retention or on occurance basis where the aggregate loss of any one occurance o an event exceds the predetermined retention.

Used where the loss amount (claim amount) is of an unknown amount untill the oss actually occurs.

Question 7

Main types of excess of loss

Answer 7

Catastrophe reinsurance
* Aim is to reduce the potential loss to the cedant due to any non-independence of the risks insured
* Cover usually only on a yearly basis
* Reinsurer will agree to pay out if a catastrophe, as defined in the contract, occurs. Typically there needs to be a minimum number of deaths from a single incident within a specified timeframe say 48 hours of that incident.
* Cover may exclude war risks, epidemics and nuclear risks

Stop loss reinsurance
* Reinsurer pays the aggregate net loss over the predetermined retention limit for a portfolio over a given time period, usually a year.
* In this way the cedant’s potential loss on the portfolio in any period is capped

Question 8

Financial reinsurance description

Answer 8

• Primarily used as a means of improving the apparent accounting or supervisory solvency position of the cedant
• Not foccused on the transfer of insurance risk but rather managing the cedant’s capital position.
• Not effective in accounting or supervisory regimes where credit can already be taken for future profits and/or where a realistic liability has to be held in respect of loan repayments.

Risk premium reinsurance
* The reisnurer pays a higher initial commission in order to relieve the cedant’s new business financing requirement.
* In return for this higher initial commission, the reinsurer increases its risk premium rates in future years.

Contingent loan
* Reinsurer provides a loan to the cedant, but as the repayment of the loan is contingent upon the stream of profits being generated by the business, the cedant may not need to reserve for the repayment within its supervisory returns (depending on the regulatory regime)
* I.e. loan is not shown as a liability since the repayments will only materialise should the VIF profit materialise.

Question 9

Faculative and obligatory reinsurance treaties

Answer 9

Agreement between ceding company and reinsurer may be:
* faculative/faculative
* faculative/obligatory
* obligatory/obligatory

Faculative: Cedant is free to decide whether or not to reinsure its risk and with whom, while for the reinsurer it means that it may accept or reject the reinsurance offered.