Chapter 44: Risk Management Tools (1) Flashcards
1
Q
What are the benefits of reinsurance?
A
- Reduce claims volatility
- Smooth profits
- Reduce capital requirements
- Increase capacity to write business and more diversification
- Reduce risks
- Business
- Operational
- Limit large losses
- Single event
- Single claim
- Cumulative events
- Concentration of risks -> geographically or portfolio
- > increases solvency and capacity to write business
- Access to reinsurance expertise
- Cost saving (tax)
- Easier to plan
2
Q
What factors must you consider when choosing reinsurance?
A
- Value for money
- Stable profits
- Management and shareholder’s attitude to risk
- Company
- Size and structure
- Amount of business written
- Type
- Experience
- Free assets
- Security of reinsurance
- Terms of reinsurance
- Underwriting cycle
- Mary’s = Market reputation
- Technical assistance needed
- Accumulation of risks
- Statutory solvency
3
Q
What can reinsurers help with?
A
- Risk cover
- Expertise
- Product design
- Pricing advice and the actual service
- Underwriting advice and the actual service
- Provide data
- Information on competitors and their prices
- Admin systems
- Computer power
- Claims controls
- Provisioning
- Contract wording
- Marketing and distribution channels - New business strain and solvency
- Through FinRe
- Increase solvency, and tax position, reduce capital requirement, help with liquidity
- E.g. contingent loans or financial quota share arrangements -> financing commission attractive
4
Q
List the main types of reinsurance.
A
Proportional - Quota share - Surplus Non-proportional - Risk XL - Aggregate XL - Catastrophe XL
5
Q
Discuss quota share.
A
-> Reinsurance is a fixed % of each risk \+ Simple admin \+ Spread risks \+ Write more business \+ Encourage reciprocal business -> company reinsures part of business in exchange for accepting part of the reinsurer’s business. - Same percentage regardless of size - Same percentage regardless of volatility - No cap on claims
6
Q
Discuss surplus as a proportional reinsurance tool.
A
- > The treaty specified a RL and EML
- > Company retains RL/EML
\+ Spread risk \+ Accept larger risks \+ Flexibility \+ Fine tunes experience - Complex admin
7
Q
What are the advantages and disadvantages of non-proportional reinsurance?
A
\+ Caps losses \+ Take larger risks \+ Stabilise profits \+ Reduce variance of claim amounts \+ Efficient use of capital \+ Protect cedant against large losses
- Premiums over LT > recoveries
- premiums > pure risk premium
8
Q
What factors will be negotiated in the reinsurance treaty?
A
- Type of reinsurance
- Start and end dates
- Retention limits, upper and lower limits
- Perils included
- Classes of business included
- Territorial scope
- Arbitration clause
- Stability clauses
- Other data requirements of parties
- When and how premiums will be paid
- When and how claims will be paid
- Cancellation policy
- Commission arrangements
9
Q
List the ART methods.
A
- Integrated risk covers
- Securitisation
- Post-loss funding
- Insurance derivatives
- Swaps
10
Q
What are the key features of ARTs?
A
- Tailor made to suit needs
- Multi-year, multi-line products
- Diversifies across portfolio and over time
- Non-insurers take on the risk
- Not indemnity cover
11
Q
What is a captive insurer?
A
It is when a parent company creates a licensed insurance company to ensure it’s own business. It is a form of self-insurance.
12
Q
How do discounted covers work?
A
- The insurer needs to show the liability undiscounted
- But the reinsurer can show it discounted
- So reinsurer offers reinsurance on attractive terms
13
Q
What markets offer ARTs?
A
- Banking markets
- Capital markets
14
Q
Why do insurance companies use ARTs?
A
- Tax
- Security
- Management of solvency margin
- Stable results
- Cost availability
- Cheaper
- Effective risk management
- Source of capital
- Diversification
- Expand range of insurable risks
- Increase capacities
15
Q
What are the structural inefficiencies of traditional insurance?
A
- Moral hazard
- Anti-selection since good risks subsidise bad risks
- Limited options
- Credit risk for p/h
