Chapter 30: Risk transfer

Question 1

Reasons for reinsurance (SAD LIFES / VLIEC):

CLAP U

Answer 1

Smoothing of results / Smaller capital requirements
Avoid large losses - Single/aggregated events or claims
Diversification
Limit exposure to large risks caused by:
- Single risk
- Single event
- Aggregation of events
Increase capacity to write more business/large risks
Financial assistance
Expertise
Services (Operational/Strategic) / Solvency risk reduced

Volatility in the claims experience reduced 
- Smoother profits and results 
- Increased capacity to write more risks + diversify 
- Capitol requirements reduced 
Limits large losses from 
- Single large claim 
- Cumulative event 
- Catastrophe 
Insolvency risk reduced 
Expertise 
Capacity to write larger risks

Credit risk
Liquidity risk
Administration cost
Profitability affected as premiums are ceded

Underwriting

Question 2

Reasons for ART include (DESCARTES):

Answer 2

Diversification
Exploits risk as opportunity
Solvency management, sources of capital - CatBond
Cheaper than other types of cover
Available when other cover might be unavailable
Results stabilized (Smoothing of results)
Tax advantages
Effective provision of risk management
Security of payment greater

Question 3

Examples of ART contracts include (PISSI)

Answer 3

Post loss funding
Insurance derivatives
Securitisation (Catastrophe bonds)
Swaps
Integrated risk covers

Question 4

Merits of XoL reinsurance:

CaPESH PPG

Answer 4

+Caps losses, so can take on large risks
+Protects against individual/aggregate large claims
+Efficient use of capital (less provisions) due to less volatility
+Stabilises technical results (
+Helps stabilise profits

• Premiums are expensive
• XL premiums may occasionally be far greater than pure risk premium due to underwriting cycle
• General poor claims experience not protected against

Question 5

Expertise of reinsurer ADUPAPA:

Answer 5

Administration terms 
Product Design/Data
Underwriting and claims control systems
Pricing  
Actuarial services 
Policy wording 
Administration system

Question 6

Merits of Proportional Reinsurance
Quota share: SHeRiL PC
Surplus: R FHAM

Answer 6

PR Quota share
\+ Simple to administrate
\+ Reciprocal Business encouraged 
\+ Helps to diversify risk
\+ Larger portfolios of risk written 

• The same Proportion of each risk is ceded regardless of size
• and volatility
• It does not Cap the cost of very large claims

PR Surplus
+Reduces company’s exposure to certain risks
+Flexible, useful in achieving a well-balanced portfolio of risk
+Helps insurer to spread risk / Heterogeneous risks can be insured with this agreement
+Allows insurers to accept large risks

-More complex administration compared to share quote due to proportions changing for each risk

Question 7

Factors affecting the extent of risk Transfer AC CROW

Answer 7

Appetite for risk
Cost of transferring the risk

Counter party risk
Resources existing to finance the risk event if it happens
Probability of the risk Occurring
Willingness of a third party to take on the risk

Question 8

ART definition

Answer 8

A means of transferring risk other than traditional reinsurance. It produces tailor-made risk transfer solutions for risk transfer that the conventional market would regards as uninsurable

Question 9

Reinsurance definition

Answer 9

An arrangement whereby one party (the reinsurer), in consideration for a premium, agrees to indemnify another party (cedant) against part or all of an insurance liability.