Ch30: Reinsurance (2)

Question 1

Purpose of reinsurance

Answer 1

• raise capital
• limit the amount paid on any particular claim
• limit total claims payout
• reduce insurance parameter risk
• reduce claim payout fluctuations
• receive technical assistance
• reduce new business strain
• increase profits or risk adjusted return on capital
• reduce overall capital requirements by using reinsurer’s capital
• separate out different risks from a product
• allow aggregation of risks that the cedant cannot manage on its own

Question 2

Other ways of reducing claim payout fluctuations

Answer 2

• mortality fluctuations reserve
• to decline high sum assured proposals

Question 3

Cost reduction - reduces cost of reinsurance

Answer 3

Due to various reasons (including different capital requirements, diversification benefits, different taxation and different assessment of risks) a reinsurer may be able to price the risk at a lower cost than the cedant

Question 4

Factors to consider when setting retention limits:

Answer 4

1. the average benefit level for the product and expected distribution of the benefit
2. the company’s insurance risk appetite
3. the level of the company’s free assets and importance attached to the stability of its free assets ratio
4. the terms on which reinsurance can be obtained and the dependence of such terms on the retention limit
5. the level of familiarity of the company with underwriting the type of business involved
6. the effect on the regulatory capital requirements
7. the existence of a profit-sharing arrangement
8. retention on other products
9. nature of any future increases in sums assured

Question 5

Approaches to determining retention limit

Answer 5

• stochastic simulation - reinsurance only
• stochastic simulation - reinsurance with fluctuations reserve
• financial economics approach (based on theory of efficient investment frontiers, optimise risk vs reward trade-off)

Question 6

Deposits back

Answer 6

• way to reduce counterparty default risk
• requires the reinsurer to collateralise its share of the total reserve under a reinsured contract

Question 7

Reasons for reinsuring

Answer 7

1. reducing parameter and claim payout fluctuation risk
2. financing new business strain - use financial reinsurance and/or QS
3. obtain technical assistance
4. benefit from regulatory or tax arbitrage opportunities
5. reducing costs

Question 8

Considerations before reinsuring

Answer 8

1. counterparty risk
2. legal risks
3. cost of reinsurance
4. type of reinsurance
5. amount of reinsurance