Chapter 11 - Managing Exposure

Question 1

Market Cycle

Answer 1

• Higher profits - Higher capacity for that class - Higher competition - Lower prices - Lower profits - Capacity withdrawn - Lower Competition - Higher prices -

Question 2

Hard and Soft Markets

Answer 2

When rates are reducing the market is softening.
When rates are increasing the market is hardening.

Question 3

Why do Underwriters seek Reinsurance?

Answer 3

• Protection of the account against a single large event
• Protection of the account against a large claim on a single item
• Protection of company capital
• Protection against fluctuating claims costs from year to year
• Operating capacity
• Entering a new market
• Building up the account
• Minimising loss impact on income generated
• Underwriters’ peace of mind
• Sharing heavy/hazardous risks

Question 4

Types of Reinsurance

Answer 4

Proportional:
* Quota share
* Surplus

Non-proportional:
* Excess of loss
* Stop loss

Question 5

Quota Share

Answer 5

An agreed proportion of all insurances written by an insurer will fall within the treaty. E.g. if an insurer has a treaty covering 60% of it motor portfolio, the reinsurer will accept liability for 60% of every policy written.
Advantage is that it is very easy to administer. Disadvantage is the insurer must pay the reinsurer premiums for risks that it could retain.
Utilised by new insurance companies, or existing companies embarking in a new class of insurance.

Question 6

Surplus

Answer 6

Insurer only reinsures those risks where the sum insured exceeds its own retention limit.

Question 7

Excess of Loss

Answer 7

Can be written on a per risk basis or a per event basis.

Question 8

Stop Loss

Answer 8

Insurer is primarily concerned with protecting its loss ratio. E.g. an insurer can obtain reinsurance for claims that exceed an 80% loss ratio.
Reinsurers would usually limit their maximum liability and insist that an insurer shares any reinsured loss.