Chapter 24 Reinsurance (1) Flashcards
What are the main “types” of reinsurance? (7 points)
- Facultative and obligatory reinsurance
- Original terms reinsurance (coinsurance)
- Risk premium reinsurance
- Excess of loss reinsurance
Catasrophe
Stop loss - Financial reinsurance
risk premium financial reinsurance
contingent loan financial reinsurance
Define original terms reinsurance (4)
What key aspects of original terms reinsurance/coinsurance shall we consider? (6)
- Original terms insurance involves
sharing of all aspects of original contract
hence, premium split between insurer and reinsurer in fixed proportion
and any claim is split in same proportion
reinsurer shares in full risk of policy including investment/early lapse risks - For original terms reinsurance (coinsurance) we consider the following key points
Determining the reinsurance premium
provision of premium rates
reinsurance commission
its impact on cedant’s cost of reinsurance
other factors to consider in addition to it
what determines how much is paid
Specficying the amount to be reinsured
Describe the 3 steps involved in determining the reinsurance premium rates to charge for original terms reinsurance (coinsurance)
- Cedant provides premium rates (aka retail rates) to reinsurer for business class to be insured, for reinsurer to check adequacy.
- Reinsurer determines reinsurance comm rates prepared to pay cedant for business
reinsurance comm thus determines overall net cost of reinsurance for cedant
higher commission, lower reinsurance cost; insurer then decides to accept/not - Alternatively, reinsurer provides prem rates to insurer upon which they load costs/profit test against intended retail rates
ie reinsurer decides level prem rate for risk, to charge cedant for reins
also called ‘level risk premium reinsurance’, common for risk business
prems/claims not strictly shared in fixed %, so more risk premium reins
reins comm likley much less with this variation, as reins prem probably has lower margins than retail rates
more common approach, given recent competition level in retail markets requires frequent prem rates changes
What is the main impact of reinsurance comm offered on an original terms reinsurance (coninsurance) contract?
Under original terms reinsurance (coinsurance), when considering which reinsurer, in addition to considering reinsurance commission being offered by a reinsurer, in what other ways may a reinsurer appear more attrative over another? (3)
Reinsurance comm will have main impact of
reducing net reinsurance cost for insurer who will then have to decide whether or not to accept reinsurance, or consider other factors in favour of the reinsurer
reinsurance comm is usually based on reinsurance prem paid
eg usually defined as % of reinsurance premium
In addition to reinsurance commission, insurer can consider following attractive features of an insurer
financial strength:
reinsurer with greater strength will be less likely to default
coverage offered:
reinsurer offering broader coverage will be more attractive eg
accept higher sums assured or accepting older-age applicants
profit-sharing arrangements:
reinsurers offering a profit sharing arrangement, or more generous arrangement will appear more attractive
Under original terms reinsurance (coinsurance) what 2 methods may be used to determine the amount of risk to be reinsured?
What method is used in practice to set the amount reinsured under original terms reinsurance (coinsurance)? (6)
Amount of risk to be reinsured can be determined in following 2 ways:
Quota share:
amount reinsured specified % of each policy is specified
eg 30% quota share: 30% reinsured, and 70% risk retained by cedant
Individual surplus:
reinsured amount is excess of
original benefit
over cedant’s reterntion limit on any inividual life
eg for 100 000 sum assured, with cedan’ts retention limit of 40 000
40% of risk would be retained, 60% of risk would be reinsured
Define risk premium reinsurance (5)
What key aspects of risk premium reinsurance do we consider? (3)
Under a risk premium reinsurance arrangement
cedant reinsurers part of..
sum assured, or
sum at risk ie excess of benefit over reserve
…on the reinsurer’s risk premium basis
which can be either
annually renewable or
guaranteed
For risk premium reinsurance, we consider the following key point
Determining the reinsurance premium
General features specific to this type of reinsurance
Specifying the amount to be reinsured
How it compares with original terms reinsurance (coinsurance)
Risk premium reinsurance can be used to reduce new business strain. [½]
The reinsurer provides a ‘loan’ to the insurer in the form of reinsurance commission based on the
volume of business reinsured. [½]
Describe the steps involved in determining the reinsurance premium rates to charge for risk premium reinsurance:
the general steps of the process (3)
the calculation of the risk premium (3)
Reinsurer determines risk premium rates by
assessing likely experience of the business it is to reinsure
and then adding expense and profit margins
reinsurer may or may not guarantee these rates for the term of the policy
What are the similarities between risk premium reinsurance and original terms reinsurance (coinsurance)? (3)
Both risk premium reinsurance and original terms reinsurance (coinsurance)
can speficy how much is reinsured using either
quota share arrangements or
individual surplus arrangements.
Cover the differences between the coinsurance and risk premium insurance by considering
coinsurance on original terms (2)
coinsurance on level risk premium terms (3)
risk premium reinsurance (5)
Differences can be summarised as follows:
coinsurance, original terms
insurer sets premium, reinsurance premium in direct proportion to this.
reins comm agreed with reinsurer sets price of reinsurance and usually very significant.
coinsurance, level risk premium
reinsurer sets premium for its share of the risk, based on its share of the full sum assured.
insurer then calcs own premium rates with knowledge of the reinsurance premiums it will be paying.
reinsurance comm usually not significant.
risk premium reinsurance
reinsurer sets reinsurance premium rates.
risk premium operates as recurring single premium, with each premium covering the immediate period of risk.
reinsurer may cover part of full sum assured or part of the sum at risk.
risk premium will vary from period due to changes in the sum at risk, age of policyholder, or result of rate reviews.
reinsurance commission usually not significant.
Define excess of loss reinsurance (3)
What key aspects of excess of loss reinsurance shall we consider? (4)
Catastrophe reinsurance – shares in the total claims above a threshold from multiple claims
from a single event. Renewable annually. Covers non-independent risks, eg group life
insurance. There may be multiple lines for group business.
Stop loss reinsurance – covers the excess of all aggregate claims in a year over a threshold,
up to a maximum. Stop loss reinsurance means that the reinsurer pays the aggregate net loss over the
predetermined retention for a portfolio over a given period, usually a year. In this way, the
portfolio’s loss to the cedant in any period is capped.
Purpose
The aim is to help protect the ceding company from large adverse fluctuations in claim costs, in
order to help stabilise the company’s profit flow and ultimately to protect the company from
ruin. [1]
Catastrophe reinsurance cover relates to the aggregate losses arising from a single event
Manage capital position using reinsurance - Contingent loan
This approach makes use of the future profits contained in a block of new or existing business. [½]
The reinsurer provides the insurer with a cash loan. [½]
In return, the insurer will repay the loan to the reinsurer over a number of years. [½]
The repayments are contingent on the profits emerging from the business, and will not be paid if
the profits do not materialise. [½]
The assets in the company’s supervisory balance sheet will be increased by the amount of the
loan. [½]
However, in some regulatory regimes the future loan repayments will not be included in the
liability value shown in the balance sheet. [½]
The net effect is then to increase the value of the free assets in the company’s balance sheet, so
increasing capital. [½]
However, this form of financial reinsurance is not effective under accounting or supervisory
regimes where credit can already be taken for the future profits and/or where a realistic liability
has to be held in respect of the loan repayments. [1]
(iii)(a) Reduce new business strain from conventional term assurance
Probably best to use original terms quota share, with large initial reinsurance commission. [½]
Choose original terms as this will help with reducing supervisory reserves (in proportion to the
amount reinsured – regulations permitting – and is simpler than risk premium to administer). [½]
Choose quota share as new business strain is proportionate to total volume of business sold, and
is not affected by the size of individual policies. [½]
Alternatively, might use the net level risk premium arrangement, with increased initial
commission payments for increased risk premiums, again on a quota share basis. [1]
(iii)(b) Reduce claim fluctuations from conventional whole life policies
Risk premium individual surplus would do for both with- and without-profits forms, using a sum at
risk basis. [½]
The reserve is not at risk and becomes significant in size later in the policy term; basing the
reinsurance on the sum at risk only is much cheaper (for same amount of protection) than full
sum assured methods. [½]
Individual surplus would be chosen, as it is important not to retain more than a maximum
absolute sum at risk per policy, regardless of the total sum at risk under the policy. [½]
Could use original terms with deposit back for with-profits, as the total benefits (including any
bonuses added to benefits) will be reinsured as well as just the basic (initial) sum assured.
Deposit back is then needed, to protect the reinsurer from the investment risk of having to
replicate the direct writer’s bonus rates. [1]
(iii)(c) Unit-linked with large death benefit
Risk premium individual surplus based on the sum at risk is the obvious choice for reducing claim
fluctuations. [½]
This is because it allows the insurer to retain its full unit reserves (which do not constitute any
mortality risk), it keeps the insurer’s risk concentration below a maximum level and is
administratively straightforward for unit-linked. [1½]
Would need quota share risk premium with high initial commission to control new business strain
(higher risk premium rates would be charged to repay the initial commission over time). [1]
This will also help to reduce the company’s exposure to adverse claim experience. [½]
