Chapter 25 Reinsurance (2)

Question 1

Reasons for reinsuring

Answer 1

 limiting claim payouts (single or total)
 reducing parameter and claim payout fluctuations risks
 financing new business strain – use financial reinsurance and/or quota share
 obtaining technical assistance
 benefiting from regulatory or tax arbitrage opportunities
 reducing costs
 separating out different risks from a product
 allowing aggregation of risks that could not otherwise be written.

Question 2

In any case a unit-linked
company would not normally use original terms reinsurance

Answer 2

as the reinsurer would need to
match the unit liability under the reinsured part of the contracts, and if the link is to the
ceding company’s internal fund it would not be able to do this directly.

Question 3

Which types of reinsurance would be used for the purpose of reducing new business strain? (6)

Answer 3

Types of reinsurance which might help reduce new business strain include

original terms coinsurance usually on quota share basis
usually pass some liability to reins, so insurer can hold lesss reserves
hence, reducing new business strain by around same proportion
more significantly, large initial reinsurance comm contributes to insurer’s assets at time of sale, effectively discounting future profits that would’ve been tied up in the large reinsurance premiums
risk premium reinsurance usually on quota basis
financial reinsurance (if effective under regulatory regime)
​improve balance sheet of insurer immediately, thereby increasing available capital