Chapter 29: Reinsurance (1) Flashcards
Define reinsurance
Reinsurance is an arrangement whereby one party (the reinsurer), in consideration for a premium, agrees to indemnify another party (the cedant) against part or all of the liability assumed by the cedant under one or more insurance polices, or under one or more reinsurance contracts.
Define excess of loss reinsurance
- Excess of loss reinsurance can be enacted on a risk basis, where the reinsurer pays any loss on an individual risk in excess of a predetermined retention.
- Excess of loss can also be enacted on an occurrence basis where the aggregate loss from any one occurrence of an event exceeds the predetermined retention.
Coinsurance - original terms reinsurance:
- original premium and benefits are proportionately shared.
- the insurance company sets the premium, and the reinsurance premium is in direct proportion to this.
- reinsurance commission is significant and determines the price of reinsurance.
Factors that the reinsurer would consider when deciding on how much reinsurance commission to offer: (3)
- the profit it expects to make from the business
- the risk that it is taking on
- how much it wants to obtain the business, taking into account competition from other reinsurers.
Two ways in which the amount to be reinsured can be specified (Original terms):
- Individual surplus - the reinsured amount is the excess of the original benefit over the cedant’s retention limit on any individual life.
- Quota share - a specified percentage of each policy is reinsured.
Coinsurance - level risk premium approach:
- Reinsurer sets a level premium rate for its share of the risk, based on its share of the full sum assured.
- the insurer then calculates its own premium rates taking this into account
- the reinsurance commission is usually not significant.
Two ways in which the amount to be reinsured can be specified (Risk premium reinsurance):
- Individual surplus - the reinsured amount is the excess of the original benefit over the cedant’s retention limit on any individual life.
- Quota share - a specified percentage of each policy is reinsured.
Catastrophe reinsurance:
- The aim is to reduce the potential loss to the cedant due to any non-independence of the risks insured.
- The cover is usually only available on a yearly basis and must be renegotiated each year.
- The reinsuring company will agree to pay out if a “catastrophe”, as defined in the reinsurance contract, occurs.
Stop loss reinsurance:
Stop loss reinsurance means the reinsurer pays the aggregate net loss over the predetermined retention for a portfolio over a given time period, usually a year.
In this way, the portfolio’s loss to the cedant in any period is capped.
Two methods of financial reinsurance:
- Risk premium reinsurance (reinsurance commission)
2. Contingent loan
Facultative (reinsurance)
Facultative reinsurance is where individual risks are reinsured as and when the ceding company writes the policy, with terms agreed for that particular risk.
This is in contrast to reinsurance under a treaty where all policies within the scope are reinsured automatically at the terms set out within the treaty.
Financial Reinsurance (Risk premium reinsurance)
- the “loan” is usually presented as a reinsurance commission related to the volume of business reinsured.
- The “repayments” - spread over a number of years - are added to the reinsurance premiums.
- The reinsurer takes into account the expected lapse experience of the portfolio of reinsurances in determining the loan repayments.
-
Financial Reinsurance (Contingent loan)
- this approach makes use of future profits contained in a block of new or existing business.
- the reinsurer provides a loan to the cedant, but, as the repayment of the loan is contigent upon the stream of future profits, the cedant may not need to reserve for the repaymennt within its supervisory returns.
Risk premium - recurring single premium approach
- Reinsurer sets premium rates.
- Risk premiums change from year to year.
- May or may not be guaranteed for policy duration.
- Reinsurance benefits based on share of full sum assured or sum at risk.
Financial reinsurance:
- Financial reinsurance can help the cedant to relieve part of its new business financing requirement.
- It can be structured like a loan, receiving either a lump sum or reinsurance commissions with repayments incorporated into the reinsurance premium or paid out of future profits.
