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Actuarial Risk Management > Chapter 30: Risk transfer > Flashcards

Chapter 30: Risk transfer Flashcards

1
Q

Choices faced by each stakeholder when faced with risk

A
  • Avoid the risk all together
  • reduce the risk - probability or severity
  • reject the need for financial coverage of the risk because it is largely diversified or trivial
  • retain all the risk
  • transfer all the risk
  • transfer part of the risk
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2
Q

How does a stakeholder evaluate each option for mitigating the risk ?

A
  • the likely effect on frequency, consequence and expected value
  • any feasibility and cost to implementing the option
  • any ‘secondary risks’ resulting from the option
  • further mitigation actions to respond to secondary risks
  • the overall impact of each option on the distribution of net present values

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3
Q

What will the extend to which a stakeholder will choose to pass on all or some of the risk depend on ?

A
  • how likely the stakeholder believes the risk event is to happen
  • the resources that the stakeholder has to finance the cost of the risk event should it happen
  • the amount required by another party to take on the risk
  • the willingness of another party to take on the risk
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4
Q

cost of risk transfer over and above the expected loss

A
  • the reward that the party to which the risk is being transferred to requires in order to accept that risk and potentially also contribute to their own profit
  • if risks are transferred the cedant forgoes both downside and upside risk
  • preserving the upside has costs associated with it
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5
Q

main benefits of reinsurance to an insurance company

A
  • a reduction in claims volatility
  • the limitation of large losses
  • Access to expertise and the data of the reinsurer
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6
Q

Explain the following benefit of reinsurance:
* a reduction in claims volatility
* the limitation of large losses
* Access to expertise and the data of the reinsurer

A

a reduction in claims volatility
* smoother profits
* reduced capital requirements
* an increased capacity to write more business and achieve diversification

The limitation of large losses
* Single claim on a single risk
* a single event
* cumulative events
* geographical and portfolio concentrations of risk and hence
* *reduced risk of insolvecy
* increased capacity to write larger risks

Access to expertise and the data of the reinsurer

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7
Q

Explain the following benefit of reinsurance:
* a reduction in claims volatility
* the limitation of large losses
* Access to expertise and the data of the reinsurer

A

a reduction in claims volatility
* smoother profits
* reduced capital requirements
* an increased capacity to write more business and achieve diversification

The limitation of large losses
* Single claim on a single risk
* a single event
* cumulative events
* geographical and portfolio concentrations of risk and hence
* *reduced risk of insolvecy
* increased capacity to write larger risks

Access to expertise and the data of the reinsurer

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8
Q

Explain the following benefit of reinsurance:
* a reduction in claims volatility
* the limitation of large losses
* Access to expertise and the data of the reinsurer

A

a reduction in claims volatility
* smoother profits
* reduced capital requirements
* an increased capacity to write more business and achieve diversification

The limitation of large losses
* Single claim on a single risk
* a single event
* cumulative events
* geographical and portfolio concentrations of risk and hence
* *reduced risk of insolvecy
* increased capacity to write larger risks

Access to expertise and the data of the reinsurer

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9
Q

How is the technical assistance offered by reinsurance a risk management tool?

A
  • it reduces business risk - appropriate assumptions
  • it reduces operational risk by transferring some activities to the reinsurser
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10
Q

Quota share reinsurance

is it propotional or non- propotional

A

A fixed percentage of each and every risk is insured
If the reinsurer covers say 8%, then it will be referred to as ‘an 8% quota share treaty’

propotional

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11
Q

Why do ceding parts use quota share reinsurance

A
  • spread risk
  • write larger portfolios of risk
  • encourage reciprocal business
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12
Q

Advantages of quota share reinsurance compared to other reinsurance products

A
  • easy to administer
  • helps diversify risk as the insurer can write more business for the same capital
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13
Q

Disadvantage of quota share reinsurance over other reinsurance types

A
  • the ame proportion of each risk is ceded regardless of size
  • the same proportion of each risk is ceded regardless of volatility / risk profile
  • it does not cap the cost of very large claims
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14
Q

surplus reinsurance treaty

A

specifies the retentiion level and a maximum level of cover available from the reinsurer
the proportion ceded is then used in the same way as for quota share

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15
Q

Advantages of surplus reinsurance treaty relative to other reinsurance products

A
  • It allows the ceding party to accept risks that would have otherwise been too big
  • it helps the ceding provider in ceding risk
  • it is flexible - can retain the less volatile risks
    *
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16
Q

Disadvantages of surplus reinsurance treaty relative to other reinsurance products

A
  • complex administration compared to quota share
  • does not cap the cost of very large claims
17
Q

Excess of loss (XL) reinsurance

A
  • non-proportional cover where the cost to a ceding company of such large claims is capped with the liability above a certain level being passed to a reinsurer
  • However if the claim amount exceeds the upper limit of the reinsurancem the excess will revert back to the ceding company
  • Usually expressed as ‘amount of layer in excess of lower limit’
18
Q

Types of excess loss reinsurance

A
  • risk XL
  • aggregate XL
  • catastrophe XL
19
Q

Risk XL

A

Relates to individual losses and affects only one insured at a time

20
Q

Aggregate XL

A

covers the aggregate of losses, above an excess point and subject to an upper limit, sustained from a defined peril over a defined period, usually a year

21
Q

What can one aggregate with respect to ?

A

event
peril
class of business

22
Q

Stop loss reinsurance

A

a subset of aggregate XL where the all perils are covered for a cedant or for a major class of business within the whole account

23
Q

Catastrophe XL

A
  • Reduce the potential loss, to the ceding company, due to any non-independence of the risks covered
  • the cover is usually available on a yearly basis and has to be renegotiated each year
  • it usually very specific, like number of claims within a 24hr period
24
Q

Outline the advantages of excess of loss reinsurance

A
  • Caps losses, hence allows the cedant to take on risks thaat could produce very large claims
  • protects the cedant against individual or aggregate claims
  • helps stabilise profits from year to year
  • helps make more efficient use of capital by reducing the variance of the claim payments
25
Q

Disadvantages of excess of loss reinsurance

A
  • The ceding provider will pay a premium to the reinsure, which, in the long run, will be greater than the expected recoveries under the treaty as it must include loadings for the reinsurer’s profits and loadings
  • From time to time, excess of loss premiums may be considerably greater than the pure risk premium for the cover
26
Q

Types of Alternate Risk Transfer contracts

A
  • Integrated risk covers
  • Securitisation
  • Post loss funding
  • Insurance derivatives
  • swaps
27
Q

Integrated risk covers

ART

A

. Instead of purchasing separate insurance policies for different types of risks, a company might opt for an integrated approach that covers a range of risks under a single agreement
* They cover financial risks that traditional reinsurance contracts do not
* They typically run for multiple years
* There will be an upper limit for aggregate risks

28
Q

What are integrated risk covers often used for

A
  • avoid buying excess cover
  • smooth results
  • lock into attractive terms
29
Q

Disadvantages of integrated risk covers

A
  • Credit risk in relation to the cover provider - might not be able to cover the catastrophe
  • Lack of availability
  • expenses arising from the tailor made aspect of the deal, as the cover provider would need full insight into the dealings of the insurer seeking cover
  • difficulty in structuring the provider’s risk management programme in a holistic, multi line way
30
Q

Securitisation

A
  • Transfer of the insurance risk to the banking and capital markets
  • Financial markets are large and capable of absorbing catastrophe shocks
31
Q

relative advantages and disadvantages of a catastrophe bond and an aggregate XL reinsurance contract to manage risk

A
  • Credit risk from the possibility of reinsurance failure
  • Asymmetry of information in the bond
  • Market capacity of reinsurer likely to be known and stable
  • Different levels of administrative burden
  • Technical assistance with reinsurer
  • New business might not be covered by bond
32
Q

Post loss funding

A
  • a way of raising capital after a risk has occured
  • typically covered by a bank
  • usually a loan on pre-arranged terms
  • Can purchase a put option on its share price, so that if the share price falls, the insurer can sell at a pre-determined price
33
Q

Swaps

A

Organisations with matching, but negatively correlated risks can swap packages of risks so that each organisation has a greater risk diversification

34
Q

Reasons why providers take out ART contracts

A
  • provision of cover that might otherwise be unavailable
  • stabilisation of results
  • cheaper cover
  • tax advantages
  • greater security of payment
  • management of solvency margins
  • more effective provision of risk management
  • as a source of capital

Actuarial Risk Management (38 decks)

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