Chapter 29 - Reinsurance Flashcards
What are the main “types” of reinsurance?
- Facultative and obligatory reinsurance
- Original terms reinsurance (coinsurance)
- Risk premium reinsurance
- Excess of loss reinsurance
+Catastrophe
+Stop loss - Financial reinsurance
+risk premium financial reinsurance
+contingent loan financial reinsurance
Describe factultative vs obligatory reinsurance (4)
The use of facultative vs obligatory essentially refers to ‘having choice’ vs being ‘obliged/obligated’ within an insurance treaty
- The term ‘facultative’
applied to cedant’s part of reinsurance means it’s free to place reinsurance with any reinsurer - so far as reinsurer is concerned means it may accept/reject the reinsurance offered
The use of ‘obligatory’ removes this freedom of action
Define original terms reinsurance (4)
- Original terms insurance involves sharing of all aspects of original contract
- hence, premium split between insurer and reinsurer in fixed proportion and any claim is split in same proportion
- reinsurer shares in full risk of policy including investment/early lapse risks
Describe the 3 steps involved in determining the reinsurance premium rates to charge for original terms reinsurance (coinsurance)
- Cedant provides premium rates (aka retail rates) to reinsurer for business class to be insured, for reinsurer to check adequacy.
- Reinsurer determines reinsurance commission rates prepared to pay cedant for business
+reinsurance commission thus determines overall net cost of reinsurance for cedant
+higher commission, lower reinsurance cost; insurer then decides to accept/not - Alternatively, reinsurer provides level premium rates to insurer upon which they load costs/profit test against intended retail rates
+ie reinsurer decides level premium rate for risk, to charge cedant for reinssurance
+also called ‘level risk premium reinsurance’,
+common for risk business
prems/claims not strictly shared in fixed %, so more risk premium reins
+reins comm likely much less significant with this variation, as reins prem probably has lower margins than retail rates
+more common approach, given recent competition level in retail markets requires frequent prem rates changes
Under original terms reinsurance (coinsurance), what factors may influence the level of reinsurance commission the reinsurer is willing to pay to the cedant?
Overview of main considerations (3)
- profits it expects to make from the cedant’s business
- risks it takes on (eg likely uncertainty in cedant’s future claim experience)
- how much it wants to obtain the business, accounting for competition from other reinsurers.
Define risk premium reinsurance
- Under a risk premium reinsurance arrangement
+cedant reinsurers part of sum assured, or
sum at risk ie excess of benefit over reserve - on the reinsurer’s risk premium basis
- which can be either annually renewable or guaranteed
Describe the steps involved in determining the reinsurance premium rates to charge for risk premium reinsurance
- Reinsurer determines risk premium rates by assessing likely experience of the business it is to reinsure
+and then adding expense and profit margins - reinsurer may or may not guarantee these rates for the term of the policy
- Risk premium may be level of the term of the policy or may vary annually with the probability of the claim
- Amount reinsured may be based on individual surplus or quota share
Define two bases on which excess of loss reinsurance can be enacted
This is a form of reinsurance that can be enacted on
- a risk basis, where the reinsurer pays any loss on an individual risk in excess of a predetermined retention.
- an occurrence basis where the aggregate loss from any one occurrence of an event exceeds the predetermined retention.
in practice, the ‘occurrence basis’ is more commonly enacted form of reinsurance
What are the general features of excess of loss reinsurance? (4)
This reinsurance useful where loss unknown until it occurs
- Renegotiated annually
- Non-proportional form of reinsurance
- May be organised in levels/lines
- Different reinsurers may then take different proportions of each line
Describe the cover typically provided by a catastrophe excess of loss reinsurance contract (7)
Cover provided is usually as follows:
- contract specifies how much reinsurer will pay if catastrophe happens
- typically, this might be excess of total claim amount, net of any amounts already reinsured, over cedant’s retention limit
- reinsurer’s liability in respect of single catastrophe claim subject to maximum amount, and any amount above this would revert to cedant
- there is also usually a maximum amount of cover per life
- reasons for maximums could be
+so that reinsurer doesn’t face unlimited liability
+to help reduce cost of reinsurance for cedant
+regulation/legislation may require this - Catrastrophe excess of loss reinsurance cover usually excludes
+war risks
+epidemics
+nuclear risks - however, seperate catrasrophe covers may be available for excluded risks
How does stop loss excess of loss reinsurance operate? (2)
Stop loss excess of loss reinsurance operates as follows
Reinsurer pays the aggregate net loss over the predetermined retention for a portfolio over a given time period, usually a year. So cedant’s loss on a portfolio in any such period is capped
As with catrasrophe excess of loss reinsurance, reinsurer’s liability is limited to specified maximum amount, and reinsurance needs to be renegotiated
What are the key features of financial reinsurance? (3)
Key features of financial reinsurance
- Devised to improve apparent cedant’s accounting/supervisory solvency position
- help insurer manage its capital position
- normally only involves a small element, if any, if transfer of insurance risk from cedant to reinsurer
Describe how risk premium financial reinsurance can be used to facilitate a financing agreement between insurer and reinsurer
- reinsurer relieves cedant of part of its new business financing requirement
- a loan is presented to insurer in the form of initial reinsurance comm, as part of the risk premium reinsurance agreement
- the repayments for the ‘loan’ are spread over several years and are added to the reinsurance premiums
- reinsurer takes into account the expected future lapse experience of insurer when determining repayments
- loan is effectively repaid by insurer from its future premium receipts - it doesn’t have to set up any additional liability for the repayments, as they are only payable for as long as policy remains in force
- so assets increase by amount of reinsurance commission, the liabilities are unaffected, and therefore net assets of insurer will increase
- a straighforward loan from reinsurer would not achive this as cedant would have to add amount of loan to its liabilities
What sort of traditional (i.e non-financial reinsurance) contract would achieve the same result as a risk premium financial reinsurance financing arrangement?
Same result can be achieved by
- original terms reinsurance - in return for large loadings that reinsurer received, a substantial reinsurance comm would be paid to insurer, producing similar effect
- original terms actually more natural method, as premiums don’t need to be artificially increased to cover reinsurance comm payments
Describe how contingent loan financial reinsurance works (5)
Contingent loan financial reinsurance works as follows
- makes use of future profits contained in a block of new or existing business
- reinsurer, again, provides loan to cedant, but repayment of loan is contingent upon stream of future profits being generated by business
- hence, cedant may not need to reserve for the repayment within its supervisory returns (depending on regulatory regime)
