Chapter 29 & 30 - Reinsurance

Question 1

In what ways could 1 reinsurer be more competitive than another? (3)

Answer 1

1. May have greater financial strength
2. Offer broader coverage
3. Offer profit sharing arrangement, or a more generous one

Question 2

2 ways in which the amount to be reinsured can be specified:

Answer 2

1. Individual surplus. Reinsured amount is the excess of the original benefit over the cedant’s retentio limit on any individual live
2. Quota share. Specified % of each policy is reinsured

Question 3

Why will the reinsurance premium on a risk premium approach change? (3)

Answer 3

1. If the reinsurance is based on the sum at risk, sum at risk is likely to have changed over the period
2. It will be based on older PHs (tend to happen only on policy anniversary)
3. If reinsurance pricing basis is not guaranteed, then it may change as a result of reinsurer carrying out a pricing review

Question 4

Reasons why insurers will reinsure: (10)

Answer 4

1. Limit amount paid on any particular claim
2. Limit total claims payout
3. Reduce insurance parameter risk
4. Reduce claim payout fluctuations
5. Recieve technical assistance
6. Reduce new business strain
7. Increase profits, return or risk adjusted return
8. Reduce overall capital requirements
9. Seperate out different risks from a product, allowing cedant to optimise its risk management and capital requirements
10. Allow aggregation of risks the cedant cannot manage on its own

Question 5

Variance of cedant’s claim can be very high due to:

Answer 5

1. Small number of contracts for very high levels of cover
2. Lives insured are not independent risks

Question 6

General factors to take into account when setting the retention limit: (9)

Answer 6

1. Average benefit level for the product and the expected distribution of the benefit
2. Company’s insurance risk appetite
3. Level of Company’s free assets and the importance attached to stability of its free asset ratio
4. Terms in which reinsurance can be obtained and the dependence of such terms on the retention limit
5. Level of familiarity of the company with underwriting the type of business involved
6. Effect on the Company’s regulatory capital requirements of increasing/reducing the retention limit
7. Existence of profit sharing arrangements in the reinsurance treaty
8. Company’s retention on its other products
9. Nature of any future increases in sums assured

Question 7

Why will a company still still underwrite its products if it has reinsurance in place? (6)

Answer 7

1. The terms of the treaty require it, as the expected claim experience of the reinsurer is heavily dependent on the level of UW in place
2. Reinsurer will expect same UW process to remain in place throughout duration of treaty. If the process is changed, the treaty will need to be renegotiated
3. The better the initial level of UW, the better the terms available from reinsurers
4. Since direct writer will keep some of the risk, it will still want to reduce its claim experience and volatility as much as it is cost effective to do so
5. If the treaty contains a profit sharing clause, this becomes more important
6. UW will reduce the opportunity for anti selection. Reinsurance is not an alternative strategy for achieving this

Question 8

What is a treaty?

Answer 8

It is a legal contract governed by contract law, which will include international trade and shipping agreements and a large body of case law

Question 9

Advantages of treaties where the reinsurance acceptance is obligatory: (2)

Answer 9

1. Direct writer can write large policies without having to refer back tonthe reinsurer, a process which might impede sales due to the delay in acceptance
2. Less administration

Question 10

How does regulatory arbitrage work?

Answer 10

• reinsurer may have lower supervisory capital requirement for writing certain kinds of business than direct writer
• means that reinsurer can write the business more cheaply than insurer can, all else being equal,