CH:30 Risk transfer

Question 1

What are the choices when faced with risk?

Answer 1

• avoid the risk
• reduce the risk
• reject the need for financial coverage
• retain all the risk
• transfer all the risk
• transfer part of the risk

Question 2

What will the choice of mitigation of risks depend on?

Answer 2

• impact on frequency and severity of the risk
• feasibility and cost of implementation
• cost and impact on profit
• secondary risks arising and how they are dealt with

Question 3

What factors will affect the extent to which a stakeholder will pass on all or some of risk?

Answer 3

• how likely the stakeholder believes the risk event to happen
• stakeholders risk appetite
• cost of transferring the risk
  -willingness of third party to accept risk

Question 4

What are the benefits or reinsurance

Answer 4

• reduction in claim volatility and hence:
  
  • smoother profits
  • reduced capital requirements
  • increased capacity to write more business and achieve diversification
• limitation of large losses arising from:
  
  • single claim on a single risk
  • single event
  • cumulative events
  • geographical and portfolio concentration

and hence:
- a reduced risk of insolvency
- increased capacity to write larger risks

• access to expertise and data from reinsurer

Question 5

Why is quota share reinsurance used

Answer 5

• spread risk
• write larger portfolios
• encourage reciprocal business

Question 6

What are the disadvantages of quota share reinsurance

Answer 6

• cedes same proportion of low variance and high variance risks
• and small and large risks
• does not cap cost of very large claims

Question 7

Explain Surplus reinsurance

Answer 7

surplus reinsurance treaty specifies a rentention level and maximum level of cover available from the reinsurer.
The proportion of risk ceded is then used in the same way as for quota share

Question 8

What is excess of loss reinsurance

Answer 8

reinsurer agrees to indemnify the ceding company for the amount of any loss above the stated excess point

Question 9

What are the different forms of non-proportional reinsurance

Answer 9

• Risk XL
• Aggregate XL
• Stop loss
• Catastrophe XL

Question 10

What is excess of loss reinsurance used for

Answer 10

• permit ceding provider to accept risks that could lead to large claims
• stabilise the results of the ceding company by reducing claims fluctuations
• reduce the risk of insolvency from large losses

Question 11

What are the advantages and disadvantages of excess of loss reinsurance

Answer 11

Advantages
* caps losses
* protects the cedent against individual or aggregate large claims
* helps stabilise profits
* helps make more efficient use of capital by reducing the variance of the claim payments

Disadvantages
* ceding provider will pay premium to the reinsurer which will be higher than expected claims
* from time to time, the excess of loss premiums may be considerably greater than pure risk premium for cover. eg, after reinsurers have a few years of poor results, the supply of reinsurance falls and premiums rise ( underwriting cycle)

Question 12

List the examples of Alternative risk transfer options

Answer 12

• integrates risk cover
• securitisation
• post loss funding
• insurance derivatives
• swaps

Question 13

Why do providers take out ART (alternative risk transfer)

Answer 13

• provision of cover that might otherwise be unavailable
• stabilisation of results
• cheaper cover
• tax advantages
• greater security of payment
• management of solvency margins
• more effective provision of risk management
• source of capital