Chapter 28 - Reisurance Flashcards
The main reasons for using reinsurance
ALIFAS
- AVOIDANCE of large single losses
- LIMITATIONS of exposure to risk
- INCREASING capacity to accept risk
- FINANCIAL assistance
- AVAILABILITY of expertise
- SMOOTHING of results
What will health and care payouts be linked to
- A sum insured
- A sum insured with agreed uplift
- Indemnify the policyholder against medical costs
Which factors will determine the insurer’s appetite for offsetting its risks by using reinsurance
FEDS S
- its available FREE assets
- its EXPERIENCE in the marketplace
- the DEGREE to which it is felt that the business outcome is predictable within bounds
- the SIZE of the insurer
- the SIZE of its portfolio
How can reinsurance help in terms of the availability of expertise
- Product design
- Pricing
- Underwriting
- Claims management
How can reinsurance help in terms of financial assistance
- Reinsurer can provide a commission to the insurer when there is more cash outflow in the initial stages than income
ie. lend now against the predicted future flows of premiums less expenses and claims
The insurer does not have a liability to repay the loan unless a surplus has been made, and so the company does not have to reserve for the future payments
What is a reinsurance commission
-It is used to describe a payment from the reinsurer to the insurer
- It is typically paid under proportional reinsurance business written on an original terms basis
- sometimes structured as a deduction from thee premium paid by the insurer
What does facultative mean
It means that the insurer is free to place reinsurance with any reinsurer
The main advantage is that the contract is flexible. the insurer can get search for the best terms, and the reinsurer can decline accepting the risk
What are the main disadvantages to the insurer of facultative reinsurance
- Time-consuming and costly
- There is no certainty that the required cover will be available when needed
- Even if cover is available, the price and terms may be unacceptable
- The primary insurer may be unable to accept a large risk until it has been able to find the required reinsurance cover
What does treaty mean
the cedent is obliged under the terms of the treaty to pass on some of the risk in a defined manner and the reinsurer is obliged to accept it
What are the main features of a treaty
- They are INFLEXIBLE - Once the treaty is set up, then both parties must operate within the terms of the treaty
- EFFICIENT - Risks are generally reinsured automatically. This is Administratively quicker and cheaper
- CERTAIN - The cedant knows that the reinsurer is available and on what terms
What are the terms usually covered in a treaty
- What is and what is not covered
- The financial arrangments (ie premiums, commissions, timing of payments)
- The obligations of both parties
What is proportional reinsurance
the insurer cedes a proportion of the risk and the reinsurer pays that proportion of the total sum insured or sum at risk
Types of proportional reinsurance
For long-term health and care :
- quota share
- surplus
either of which can be on :
- an original term (coinsurance) basis
- a risk premium basis (related either to the full benefit or to the sum-at-risk)
For short-term health and care insurance business:
- quota share (on an original terms basis)
Purposes of proportional reinsurance
- It is used mostly as a means of accepting a larger size of risk than would otherwise be possible
- It allows reinsurance commissions to be payable whereby the insurer’s new business costs or other appetite for revenue is satisfied by ‘factoring’ the future margins in premiums to be passed to the reinsurer
Explain original terms (coinsurance) reinsurance
It involves the sharing of all aspects of the original contract. It applies to both long and short-term contracts
- both premium and claims are split in the same proportion
- This means that the reinsurer shares in full the risks of the policy, including the risks of investment and early lapse
What would the reinsurance commission usually cover in respect of the reinsured portion of the policy
- the commission that has been paid by the cedant
- part or all of the initial expenses
What is the difference between risk premium and original terms
- For original terms, the insurance company sets the premium and then negotiates an amount of commission from the reinsurer
- In the case of risk premium, the reinsurer sets the premium rate, which is independent of the premium charged by the insurer
– this gives greater freedom for the insurer to respond to competitor changes in premium rates
Types of risk premium reinsurance
- Level risk premiums
- Increasing risk premiums
- Sum-at-risk reinsurance
Explain sum-at-risk reinsurance
- The proportions are not applied to the whole sum insured, but to the insurer’s ‘sum at risk’ ie. the excess of the stated policy benefit over the reserve that the cedant holds
- This method is only useful where the benefit is a lump sum, terminating the contract, and the reserves are large enough to make the adjustment significant
- For ease of administration, the terms of the treaty may stipulate the amounts of reserves from the outset, or the basis on which they are calculated
How does the reinsurer determine its risk premiums
- By assessing the likely experience of the business that it is to ensure and then adding expense and profit margins
Quota share reinsurance
- a constant proportion of each and every risk within the scope of the treaty is automatically passed to the reinsurer. The treaty will specify the proportion to be ceded
How are premiums calculated for quota share
- The premiums can either be calculated on a risk premium or original terms basis
What would the reinsurer be concerned with at the outset before giving the insurer the business
- The nature of the business being offered
- The cedant’s attitude to underwriting and claims settlement
- Any previous experience of this business
Why would an insurer use quota share reinsurance
I WATCH U Eat
- Improves the solvency ratio
- Write larger risk
- Administratively simpler
- To spread risk
- Can help reduce solvency ratio for short term business
- Helps the insurer satisfy the statutory capital requirements
- Used for financing new business strain
- Encourage reciprocal business
How to calculate the solvency ratio
- It is free assets/net written premiums
Disadvantages of quota share
- It cedes the same proportion of each risk, irrespective of size. The insurer may wish to cede a greater proportion of larger risks than the smaller ones
- It passes a share of any profit to the reinsurer
Why would an insurer use quota share reinsurance
- To spread risk
- Write larger risk
- encourage reciprocal business
- Improves the solvency ratio
- helps the insurer satisfy the statutory capital requirements
- Administratively simpler
- Used for financing new business strain
- Can help reduce solvency ratio for short-term business
What type of policies does Surplus cover work for
Fixed sum assured, chosen at the outset by the policyholder. Thus will not apply to PMI
What is the purpose of surplus reinsurance
- enables the insurer to write larger risks
- limits the exposure to policies (ie. the insurer selects a monetary limit at the outset of the treaty and reinsures the amount of any policy sum insured above this amount
What are the pros and cons of surplus reinsurance
Pros
- Allows the insurer to accept risks that would otherwise be too big
- Reduces the concentration of risk per life and so reduces claims volatility
Cons
- A company has less control of its protection against parameter risk than under quota share, as its overall share of the risk will be dependent on the size of the policies taken on
- Less suitable for financing arrangments
XL reinsurance operation
- The reinsure agrees to indemnify the cedant for the amount of any loss above a stated excess point
- Usually, the reinsurer will give cover up to a stated upper limit, with the insurer purchasing further layers of XL cover , which stack on top of the primary layer, from different reinsurers
Main types of XL reinsurance
- Risk XL
- Aggregate XL (also called stop loss)
- Catastrophe XL
Risk XL
- Relates to individual losses
- Affects only one insured risk at any one time
Aggregate XL / stop loss
This is when the excess point and the upper limit apply to the aggregation of multiple claims
Catastrophe XL
Cover may be defined in terms of common cause or peril ( single event)
Main purposes of non-proportional reinsurance
- To permit an insurer to accept risks that could lead to large claims
- Reduce the risk of insolvency from a catastrophe, a large claim or an aggregation of claims
- Reduce claims fluctuations, which in turn, requires lower reserves
Cons of XL
- The premium will be in the long-run greater than the expected recoveries under the treaty
Features of Fin Re
- main devised primarily as a means of improving the apparent accounting or supervisory solvency position of the cedant
- Aims to manage the insurer’s capital position
What is a contingent loan
- The reinsurer provides a loan to the cedant, but, as the repayment of the loan is contingent upon the stream of future profits being generated by the business, the cedant may not need to reserve for the repayment within its supervisory returns
- this loan does not have to be taken as a liability on the insurer’s balance sheets
- this loan is used to improve the direct company’s solvency position
- or wishes to fund a new project
Is reinsurance commission on payable when reinsurance is on an original terms basis?
Yes
Risks relating to the insurer’s operations a reinsurer would face if it made stop loss cover available
PAPPI
- Poor claims handling control
- Adverse claims experience (large claims or random events)
- Poor underwriting by insurer
- Poor premium rating structure leading to adverse selection
- Insurer’s premiums generally under-priced (e.g. competitive market)
Advantages of XL to an insurer
APES
- ALLOWS the insurer to take on risks that could produce very large claims
- PROTECTS company against individual large claims
- Helps make more EFFICIENT use of the capital by reducing the variance of the claim payments
- Helps STABILISE profits from year to year
Disadvantages of XL
- The insurer will pay a premium to the reinsurer which in the long run will be greater than the expected recoveries under the treaty
- An XL reinsurer’s premium will load the expected claims for expenses, profits and contingency margins
- From time to time, XL premiums may be considerably greater than pure risk premium for the cover
