Chapter 30

Question 1

Uses of reinsurance

Answer 1

• Raise capital
• Limit amount paid on particular claim
• Limit total claims payout
• Reduce insurance parameter risk
• Reduce claims payout fluctuations
• Technical assistance
• Reduce new business strain
• Increase profits, return or risk-adjusted return on capital
• Reduce overall capital requirements
• Separate out different risks from a product
• Allow aggregation of risks that cedant cannot manage on its own (allowing manufacture of product lines)

Question 2

Factors to consider when setting the retention limit

Answer 2

• Average benefit level and expected distribution of benefit
• Company’s insurance risk appetite
• Level of free assets and importance attached to stability of free asset ratio
• Terms on which reinsurance can be obtained and dependence of such terms on retention limit
• Level of familiarity of underwriting type of business
• Effect on regulatory capital requirements
• Existence of profit-sharing arrangement in reinsurance treaty
• Company’s retention on other products
• Nature of future increases in sums assured