Chapter 3 - Reinsurance Flashcards
The four reasons why insurers buy reinsurance
- Risk transfer
- Peace of mind
- Balancing peaks and troughs - some classes of business may be not profitable every year
- Releasing capacity
Three reasons why firms sell reinsurance
- Accessing business not otherwise available - local insurer seeks reinsurance in international market as they don’t have capacity for the whole risk.
- Becoming involved in a class of business on trial basis - safer way to try out new class of business
- Pure business preference
What percentage of business written in Lloyd’s is reinsurance?
31%
LM has reputation for having capacity
What is retention/retained line?
Amount of original risk the insurer is retaining.
Maximum size important when working out how much reinsurance needed.
What are the three types of claim pay out decisions? (Who decides on claims, reinsurer or original insurer)
- Full follow clause - Insurer makes all claims decisions
- Claims co-op clause - Original insurer has to advise reinsurer of loss and keep updated
- Claims control clause - Reinsurer has full decision making control
Cede
Cedant
Cession
Retrocedant
Retrocession
Retrocessionaire
Cede - Share risk with reinsurer
Cedant - Original insurer
Cession - Share of risk passed on
Retrocedant - Reinsurer obtaining reinsurance for itself
Retrocession - Cession where Reinsurer ceding to another
Retrocessionaire - Reinsurer accepting reinsurance from another reinsurer
Collecting note
Document used to present claim to reinsurers for excess of loss reinsurance
Facultative reinsurance definition
Reinsurance purchased for individual risk.
Non proportional reinsurance
Premium and claims don’t have direct correlation
More in line with direct insurance
Claims dealt with on financial rather than shared basis
Eg. Excess of loss, Stop loss
Proportional reinsurance
Premium and claims shared between insurer and reinsurer
No financial limitations
Eg. Quota share, surplus treaty reinsurance
Treaty reinsurance
Purchased to cover wider portfolio of risks or whole book of business
Fac reinsurance
Protects one individual risk only
- Reinsurance protecting account may have restrictions. Insurer may purchase Fac if a risk falls outside group definition.
- only responds to one risk
- insurer may have written unusual risk and Fac is only reinsurance which will cover it
- Time consuming and expensive administratively
Fac obligatory reinsurance
Insurer agrees with reinsurer
For all risks written within pre-agreed criteria
Insurer has choice to cede risks to reinsurer
If it decides to cede, reinsurer has obligation to accept.
Insurer could potentially keep good risks to itself (anti-selection)
Operates best when trust each other
Excess of Loss reinsurance
XL
- Non-proportional (no concept of sharing premium in proportions)
- Cover bought in layers to build reinsurance program
- Insurer considers potential claim size to decide how many layers needed to protect itself.
- Reinsurance starts from 0 at bottom
- Each layer is a policy limit and will respond depending on size of claim. Lower layers (working layers) more likely to have claims than catastrophe layers and so will charge more
- might reinstate to bring layers back to life if total amount reached but charge for this
Claims under XL
XL can be purchased as Fac but tends not to be. Reinsurance contracts usually cover more than one risk and group them:
- single classes of business
- single risk
- all marine/all non-marine
- whole account
Insured considers if claims can be grouped together and presents to reinsurers on collecting note.
Stop Loss Reinsurance
Variation on XL policy - layers used but linked to insurers combined ratio.
Combined ratio = percentage of premium represented by claims and operating costs.
If combined ratio is less than 100 insurer is in profit.
Eg. £1m premium.
£800,000 Claims and operating costs.
Combined ratio = 80%
Stop Loss cover bought to protect in event of loss. Provides layer of reinsurance protection. Triggered when insurers combined ratio exceeds a stated point.
Proportional reinsurance’s
Clear relationship between premium original insurer receives and amount passed to reinsurers.
Two standard contracts:
- Quota share treaty
- Surplus treaty/surplus line treaty
Quota Share Treaty
Set up between insurer and reinsurer at start of year.
- for every risk insurer accepts it will cede it to the treaty and pay agreed proportion to reinsurer
- insurer will retain a percentage of the risk and can transfer rest to reinsurer
Eg. Retains 70%
Accepts 10% line on a risk
Can transfer 30% of the 10% to reinsurer
(This is a 30% quota share)
Reinsurer receives 30% premium and pays 30% claims
Surplus treaty/Surplus line treaty
Original insurer buys reinsurance in ‘lines’
Each UW has a ‘maximum retained line’
Insurer controls how large a share of any risk it can accept.
For a good risk, a larger than permitted share might make good business sense. This reinsurance allows UWs permitted line to be increased in multipliers of the original line.
If UW writes risks eligible for cession to this treaty, they have to share premium with reinsurers in proportions
TRIA
Terrorism Risk Insurance Act
- Government based reinsurance programme
- Terrorism related reinsurance cover for commercial market, property
- If loss occurs on commercial market claims can be made on the US government scheme.
UK: Pool Re
France: Gareat
Australia: ARPC
Reinsurance programme construction
Ideal: gives not too little or too much reinsurance
Basic principles:
1. Whether any risks unusual enough not to fit proportional or non-proportional treaty contracts (Fac)
2. Individual classes of business and reinsurance for all risks that fall into those classes.
Proportional classes considered first, then non.
3. XL protection for all marine classes together / all non marine classes together. Specific risk excess.
4. XL protection for whole account
5. Catastrophe XL protection for whole account
