Chapter 3: Reinsurance Flashcards
Reinsurance
Insurance where insured is an insurer
Insurers purchase it to transfer some of their own risk and reduce exposure to losses
Why insurers buy reinsurance
- Risk transfer
- Peace of mind (protection from catastrophe)
- Balance out peaks and troughs
- Releasing capacity
Why firms sell reinsurance
Gaining access to business otherwise not available
* usually due to regulators restricting local business
* reinsurers gain access to business they are not allowed to write directly
Becoming involved in a class of business on a trial basis
Pure business preference
Retention/retained line
Amount of the original risk the insurer is retaining
Full follow clause
Insurer makes all the claims decisions, just gives reinsurer with the bill
- reinsurer can ask questions to ensure the settlement was made within the T+Cs
- Reinsurer will want to make sure insurer has not paid an ex gratia or settlement to keep goodwill
Claims Co-operation Clause
Insurer advises reinsurer of claims and how they are handling it
Reinsurer doesnt have any rights to intefere with strategy or decision making
Claims control clause
- Allows reinsurer full decision-making control with respects to claims
Cede
Act of sharing the risk with reinsurers
Cedant
Original insurer buying reinsurance
Cession
Share of risk passed to reinsurers
Collecting note
document to present claims to reinsurers for XoL RI
Facultative RI
- purchased for an individual risk
- only respond to claims on that one risk
Non-proportional reinsurance
- RI where premium and claims do not directly correlate.
XoL and stop loss RI
Claims paid out in excess of a pre-agreed amount
Proportional RI
Premium and claims are shared between insurer/reinsurer in pre-agreed proportion (e.g. 20%)
Quota Share and surplus treaty RI
Reinstatement
Potential for a layer to be brought back to life, for payment of additional premium
price and number of times this can be done will be specified in the contract
e.g.
Layer of US$1m xs US$1m with 3 reinstatements
Total of 4 losses could be paid out on this contract or an aggregate of US$4m in smaller losses
Reinstatement premium
Price paid by the cedant for the reinstatement of the layer after a loss
Retrocedant
Reinsurer obtaining their own reinsurance
Retrocession
A cession where the entity ceding is already a reinsurer
retrocessionaire
reinsurer that accepts the reinsurance from the original reinsurerTr
Treaty RI
reinsurance that can be purchased to cover a wider portfolio of risks.
I.e. Whole class of business or whole insurer book of business
Facultative Reinsurance (Fac)
meaning optional/not compulsory
reinsurance which protects itself in relation to one risk only
can be used to transfer risk on only certain perils
Accounts
all risks that the insurer codes/allocates to a particular cob
Situations where someone would want Fac RI
- Insurer has written a multi section policy but only really wanted to be on one section
- Insurer has written a larger line than they wanted
- Risk is unconventional
Is reinsurance compulsory
No
Negatives of Fac
- more time consuming
- potential to be more expensive
- if too expensive the risk loses money even before claims
Fac obligatory RI
Insurer + reinsurer make agreement all risks it writes under a pre-determined set of criteria, has the choice to be ceded
- Insurer has to optional choice. If ceded, reinsurer must accept
XL RI
Excess of loss reinsurance
- non-proportional
- no concept of sharing the premiums/claims that way
- coverage bought and sold in layers of any size
- insurer has to consider potential claim size to decide how many layers of protection to buy
XL layers
- dont have to be the same reinsurers
- insurer can chose to retain the first layer rather than cede it
Determining RI premium payable
- must consider policy limit (size of layer)
- how often the layer might have claims to pay
- lower layers will have more claims
Working layers
- Lower layers in a reinsurance programme
- higher premium
Catastrophe layers
- Higher layers in a reinsurance programme
- lower premium
Premium for non-proportional reinsurance
- Shown on adjustable basis
- reinsurer’s calculation of the price will be based on cedant’s overall GWP income
- Start of year, cedant wont know how much that will be so pay a small amount up front
OGPI
Original Gross premium income
e.g.
Premium US$100,000 adjustable at 5% OGPI
If OGPI = 3,000,000
5% = 150,000
100,000 already paid as OGPI.
US$50,000 in RI premium is due
Deposit premium
Amount paid at the start of an RI contract
If deposit premium ends up above calculated %, cedant does not receive refund if is also minimum premium
Can be adjusted some time later (typically at the end)
Minimum premium
lowest amount of premium payable on contract, irrespective later adjustments
Claims under XLRI
insured has to consider whether a number of claims coming out of any one incident can be grouped
- if grouped, can make a larger claim on the reinsurers
- use collecting note which sets out details and financial loss
Calculating reinstatement premiums
if non-proportional, works similar way to aggregate policy limit in overall terms
e.g.
1m xs 1m 3 reinstatements
3.5m already paid in claims 500k left
3 RIPs 1 @100% and 2 @50%
2nd layer is 100% the value of the first layer, 3/4 are 50%
layer 1 = 100, layer 2 = 100, layer 3 = 50 layer 4 = 50
Stop Loss RI
variation on XL linked to insurer combined ratio
triggers when combined ratio exceeds a stated point
e.g. might have a policy to kick in when they reach 105% and could continue to pay out until it reaches 130%
combined ratio
% of premium income represented by claims and operating costs (including cost of RI)
Loss ratio
Pure comparison of claims vs premium
Quota share treaty
every risk accepted, it will be ceded at an agree portion
reinsurer receives every risk that falls within the criteria, even the good ones
e.g. every risk has 30% ceded to reinsurer (30% quota share)
Fronting arrangements
Local business accepting 100% quota share to get around local regulatory requirements
Calculating restrictions to size ceded under contract
e.g. 30% Quota share up to a max of 5mil
insurer writes inward risk of 6m with $600 premium
too big to RI. to calculate how much it can cede, split into 2 elements:
1. amount that can go into reinsurance (5m)
2. amount which cant (1m)
premium divided same way (500/100)
30% of the 5m can be ceded and 70% retained, likewise 30% of 500 of the premium will be ceded to the reinsurer
insurer will keep 100 of the $1m that couldnt be ceded
insurer will have 450 and reinsurer will have 150
Surplus treaty / Surplus lines
- RI bought in lines
- same as max lines/shares that it can accept on a risk
- allows an UWs permitted line to be increased in multipliers of the original line
- UW does not have to use them all each time just have the freedom to write any line
Maximum retained line
Max an UW is permitted to write
Surplus e.g.
$5 mil max line
decide max they would ever want to write is $30m (need an additional 25m / 5x their original line)
need a 5-line surplus treaty (5 lines of 5 m each added to their retained line)
5-line surplus treaty e.g.
$15m line
$5m from retained line
take 2/5 lines taking $5m each totalling $10m (premium must be shared the same way)
UW receives 15,000, they keep 5,000 but must pay 5,000 to each of the two reinsurers lines they have used
claims are split the same way (10m each)
- no restrictions on the amount of lines
Reinsurance programme construction
- ideal gives neither too little or too much with reinsurers that will be there to pay claims at the right price
Reinsurance programme principles
- Consider if individual risks are unusual enough to not fit into prop/nonprop treaty
- Think about CoBs and RI that falls into that class
- think about XL protection for whole classes
- Consider XL protection for whole account
- Cherry on top might be Cat XL protection for the whole account
TRIA
Terrorism Risk Insurance Act
renewed in 2015 under TRIPRA
TRIPRA 2015(and 2019)
Terrorism Risk Insurance Program reauthorization Act
valid until 2026
still called TRIA
Other Terrorism based government RI schemes
UK - Pool Re
France - Gareat
Australia - ARPC
Flood Re
- every uk insurer that offers home insurance must pay into the Flood Re scheme
- can continue to offer flood insurance
- insurer pays up front and then claims back from Flood Re fund
