Chapter 28 - Reinsurance Flashcards
Reasons for using reinsurance: (6)
- Limitation of exposure to risk
- Avoidance of large single losses
- Smoothing of results
- Availability of expertise
- Increasing capacity to accept risk
- Financial assistance
- Diversification
- Benefit from cheap reinsurance rates
- Improve standing in the market
5 factors that will determine the insurer’s appetite for offsetting its risks by using reinsurance:
- Size of insure
- Its experience in the market place
- Its available free assets
- The size of its portfolio
- The degree to which it is felt that the business outcome is predictable within bounds
Why might reinsurers knowingly write loss-making business? (3)
- It can expect to obtain compensating higher future profits or profits from other connected business
- When the market is at the bottom of the reinsurance cycle and in order to retain market share will be forced into accepting loss making business
- May write some products as loss leader k owing it will also be able to sell other more profitable business on the back of the initial sale
Advantages of having a treaty instead of business on facultative basis: (3)
- It is inflexible, once treaty is set up both parties must operate within the terms of the treaty
- It is efficient, risk are generally reinsured automatically. Administratively quicker and cheaper
- Certain, with a treaty the cedant knows that reinsurance is available
What is original term reinsurance (coinsurance)?
This method involves a sharing of all aspects of the original contract. Applies to both short and long term contracts
(IC sets the prm and then negotiates an amount of commission from the reinsurer)
What is risk premium reisnurance?
The reinsurer sets the premium rate, which is independent of the premium charged by the insurer
(Advantage is: changes in cedants premium rates will not necessarily require changes in reinsurance rates. Therefore givescedant greater freedomto respond to competitor changes in prm rates)
What is the sum-at-risk in reinsurance terms?
The excess of the stated policy benefit over the reserve that the cedant hold
For unit linked products it will be the excess of benefits over the bid value of units
Advantages of quota share: (5)
- Improving the solvency ratio ( free assets/ net* written premiums) if it is calculated as gross written prms it won’t improve solvency ratio
- Used for financing new business strain
- Spreading risk, reducing parameter risk in particular (usually small new insurers)
- Might be some reciprocal business for insurer
- Administratively simple
Main disadvantage of quota share: (2)
- Cedes same proportion of each risk, irrespective of size; insurer may wish to cede greater portion of larger risks than the smaller ones
- Passes a share of any profit to the reinsurer
Pros and cons of surplus reinsurance:
+ allows the insurer to a cept risks that would otherwise be too big (more effectively than quota share)
+ reduces concentration of risk er life and so reduces claim volatility
- comany has less control if its protection against parameter risk than under quota share, as its overall risk will be dependent on thebsizes of the policies taken on
- less suitable for financing arrangements
Pros and cons of individual excess of loss reinsurance:
+ insurer can take on risks that could produce very large claims
+ protects co.pany against individual large claims
+ helps stabilise profits from year to year
+ helps make more efficient use of the capital by reducing the variance of the claim payments
- pay a premium that in long run be greater than expected recoveries inder the treatment
