Chapter 30 : Reinsurance (2)

Question 1

What are the reasons for reinsuring?

Answer 1

PF RRT

Parameter & random fluctuations risk
Financial reinsurance (finance new business strain)

Reg/tax arbitrage
Reduce costs
Technical assistance

Question 2

How can reinsurance assist with parameter risk?

Answer 2

Parameter risk = risk that the claims don’t = expected due to mispricing, underwriting failures, fraud.

Quota share reinsurance would be used to share the parameter risk. (Reinsurer will review premium rates and insurers control)

Question 3

How can reinsurance assist with claim payout fluctuations?

Answer 3

Reinsurance will reduce the the variance of the claims costs.

Coinsurance on individual surplus can be used for small number of contracts with high levels of cover

XOL can be used for non-independent risks

Question 4

How can reinsurance assist with new business strain?

Answer 4

It reduces the financial risk associated with new business through:

1. Increase in available capital.
2. Reduction in it’s financing requirement.

Question 5

How can reinsurance assist with technical assistance?

Answer 5

Reinsurance company have expertise on underwriting, product deisgn, pricing and systems design.

Question 6

How can reinsurance assist with cost reduction?

Answer 6

Due to various reasons (including different capital requirements, diversification
benefits, different taxation and different assessment of risks) a reinsurer may be
able to price the risk at a lower cost than the cedant.

Question 7

What considerations should be made before reinsuring?

Answer 7

CAL TC

Costs of the reinsurance
Amount of the reinsurance (retention limits)
Legal risks

Type of reinsurance
Counterparty risks

Question 8

What cost considerations need to be taken before getting reinsurance?

Answer 8

The reinsurer intends to make a profit. So reinsurance reduces the absolute level of profit expected.

Question 9

What amount (retention limits) considerations need to be taken before getting reinsurance?

Answer 9

Retention limit-= maximum amount of risk retained by the cedant.

Need to take into account
1. Average level of benefit
2. Insurance risk appetite
3. Level of free assets
4. Level of familiarity of the company with the business involved
5. Effect on regulatory capital requirements from increasing or decreasing retention limits
6. Any future increases in sum assured.

Question 10

What legal risk considerations need to be taken before getting reinsurance?

Answer 10

Reinsurance is governed by a treaty between two companies. We need to ensure that the contract are watertight.

Question 11

What counterparty risks considerations need to be taken before getting reinsurance?

Answer 11

The cedant retains liability to the policyholder even the reinsurer defaults. The credit rating of the reinsurer is important

Question 12

What reinsurance type considerations need to be taken before getting reinsurance?

Answer 12

The type of reinsurance should solve the issue that the company is faced with.

Question 13

Reasons for reinsurance

Answer 13

SAD LIFE

Smooth results
Avoid large losses
Diversification

Limit exposure to risk (single event, accumulations)
Increase capacity to accept risk
Financial assistance
Expertise

Question 14

What factors need to be taken into account when setting retention limits?

Answer 14

1. Average benefit and expected distribution of benefit.
2. Risk appetite
3. Level of free assets
4. Level of familiarity of the company with the type of business involved
5. Regulatory capital requirements impact.