Chapter 7: Determining appropriate reinsurance (F203 Appx. 8)

Question 1

Factors influencing the amount and type of reinsurance

Answer 1

• CLASSES of business written
• size and diversification of the insurer’s portfolio
• ACCUMULATIONS of risk
• size of the FREE RESERVES
• RISK APPETITE and tolerance
• financial objectives
• general COST and AVAILABILITY of reinsurance
• ALTERNATIVES including coinsurance
• the FINANCIAL STRENGTH of reinsurance
• the reinsurers’ requirement for a minimum retention
• relationships with reinsurers and brokers
• REGULATORY REQUIREMENTS and fiscal system
• the impact of CAPITAL MANAGEMENT
• the need for TECHNICAL ASSISTANCE
• underwriters’ influences

Question 2

2 Factors influencing reinsurance under

Class of business

Answer 2

• Size and range of risks

- Volatility of experience

Question 3

3 Causes of risk accumulations

Answer 3

• Too much risk underwritten in a particular area
• Too much risk of one particular type or class underwritten
• Risks where claims may arise under different classes of business

Question 4

Coinsurance

Answer 4

A method of sharing a risk among a number of direct insurers, each of which has a separate direct contractual relationship with the insured, and is therefore liable only for its own contractual share of the total risk.

Question 5

Why would a new company use reinsurance?

Answer 5

• To reduce new business strain
• Limited experience, so they need technical assistance:
• — guidance on pricing,
• — policy design,
• — claims management,
• — underwriting management
• — access to data
• There is considerable uncertainty in the form of parameter risk (if it gets its pricing wrong)

Question 6

How can reinsurance increase value to shareholders

Answer 6

Reinsurance reduces the need for capital, so that there is more efficiency in the use of existing capital and therefore better returns to shareholders.

Question 7

List 20 claims characteristics of a generic class of business

Answer 7

DELAYS: event, reporting, settlement

CLAIMS DISTRIBUTION: frequency, severity, volatility

moral hazard

CURRENCY
INFLATION
TRENDS

LARGE claims
CATASTROPHES
REINSURANCE
ACCUMULATIONS

DEFINITION of a claim
LATENT claims
NIL claims
REOPENED claims
PARTIAL PAYMENTS

Question 8

10 Reasons for using reinsurance

Answer 8

• Diversification
• New classes
• More business
• Larger risks
• Protection
• Catastrophes
• Regulation
• Smooth profits
• Financial assistance
• Technical assistance

Question 9

Reasons for using reinsurance:

Diversification

Answer 9

Rather than writing a few large risks, the direct writer can write lots of smaller risks.
This is achieved by surplus and excess of loss.
Reciprocity is also very helpful in diversifying the portfolio.

Question 10

Reasons for using reinsurance:

Larger risks

Answer 10

The office can increase the scope of business it writes, for example through surplus and perhaps excess of loss.

Question 11

Reasons for using reinsurance:

More business

Answer 11

By reducing the variation in claim payments, less risk capital is needed. Conversely, more gross business can be written on the same amount of capital.

Question 12

Reasons for using reinsurance:

Protection

Answer 12

The solvency margin is protected from large claims.

Question 13

Reasons for using reinsurance:

Smooth profits

Answer 13

Net results are more stable over time (especially with excess of loss).

Question 14

Reasons for using reinsurance:

Catastrophes

Answer 14

Helps prevent risk of insolvency from catastrophes or other accumulations.
Use catastrophe excess of loss or other aggregate excess of loss as appropriate for the class.

Question 15

Reasons for using reinsurance:

Technical assistance

Answer 15

Reinsurers and brokers may provide useful technical services and advice to insurers that are not experienced in a particular class.

Question 16

Reasons for using reinsurance:

New classes

Answer 16

Insurers can get experience in a new class without being exposed to too much risk.

Question 17

Reasons for using reinsurance:

Regulation

Answer 17

The authorities may reduce the required level of statutory solvency to allow for the extent to which reinsurance has reduced the company’s level of risk.

Question 18

Reasons for using reinsurance:

Financial assistance

Answer 18

Via favourable commission agreements or through the direct writer hanging on to the gross premium before passing anything on to the reinsurer.
Also reinsurance as a favourable alternative to capital.

Question 19

How does the class of business influence the required reinsurance?

Answer 19

The class directly indicates the likely 
- size
- range
- volatility 
of the risks.

Question 20

Clash cover

Answer 20

XL cover for liability business,

obtained by insurers to limit their exposure to the risk that
- ONE EVENT gives rise to CLAIMS on MORE THAN ONE POLICY,
where otherwise the insurer might be liable for claims up to any retention limit for each individual policy.