Chapter 7: Determining appropriate reinsurance Flashcards
Factors influencing the amount and type of reinsurance
- class of business written, size and range of risks and their volatility
- size of insurer’s free reserves
- geographical regions in which the risks are written
- extent to which accumulations of risk are possible
- size (total premiums) and diversification of the insurer’s portfolio
- the general cost (value for money) and availability of reinsurance
- alternatives including coinsurance and protection afforded by parent company
- financial strength of reinsurers
- regulatory requirements and fiscal system
- impact of capital management
- need for technical assistance
- risk appetite and telerance
- underwriters’ influences
- financial objectives
- reinsurer’s requirement for minimum retention
Factors influencing reinsurance under
Class of business
- Size and range of risks
- Volatility of experience
Causes of accumulations of risk
- too much risk underwritten in one particular area
- too much risk in one particular type or class has been underwritten
- risks where claims may arise under different classes of business
- inward reinsurance
Specific things to consider with regards to current market conditions when determining reinsurance requirements
- availability of reinsurance
- opportunities available to find coinsurers
- perceived value for money of additional reinsurance
- security status of the available reinsurers
- regulatory environment
Coinsurance
A method of sharing a risk amoug a number of direct insurers, each of which has a seperate direct contractual relationship with the insured and is, therefore, liable only for its own contractual share of the total risk.
Insured makes a seperate claim to each coinsurer in respect of its stated proportion of the risk. Any coinsurer defaults then the insured wouldn’t receive a recovery for that part of the claim.
Specific things to consider with regards to insurer’s preferences when determining reinsurance requirements
- risk appetite and tolerance
- underwriting influences
- the need for technical assistance
- financial objectives
Things to discuss if asked to describe the claims characteristics of a generic class of business
- frequency
- severity
- volatility
- event delays
- reporting delays
- settlement delays
- large claims
- catastrophes
- accumulations
- trends
- currency
- reinsurance
- moral hazard
- partial payments
- nil claims
- definition of a claim
- distribution of claims
- reopened claims
- inflation
- latent claims
How can reinsurance increase value to shareholders?
Reinsurance reduces the need for capital, so there is more efficiency in the use of existing capital and therefore better returns to shareholders
Why would a new company use reinsurance?
- to reduce the capital strain of setting up new business
- relieving new business strain
limited experience = appreciate technical assistance - relieve parameter risk (it may price incorrectly) through sharing arrangements such as proportional and through capping arrangements such as non-proportional arrangements
Features of classes of insurance that justify calling on the reinsurers
- what different types of claim exist (ie property, liability, etc.)?
- how big is each risk?
- could there be any very large claims, and if so how likely are they (consider the tail of the distribution)?
- is there a possibility of accumulations of risk?
- what is the claim frequency and the distribution of claim amounts?
Reasons for using reinsurance
- diversification
- larger risks
- more business
- protection
- smooth profits
- catastrophes
- technical assistance
- new classes
- regulation
- financial assistance
Reasons for using reinsurance
Diversification
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 (through quota share) is also very helpful in diversifying the portfolio
Reasons for using reinsurance
More business
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.
Reasons for using reinsurance
Larger risks
The office can increase the scope of business it writes, for example through surplus and also perhaps excess of loss.
Reasons for using reinsurance
Protection
The solvency margin (excess of assets over liabilities) is protected from large claims (through excess of loss)
Reasons for using reinsurance
Smooth profits
Net results are more stable over time (especially with excess of loss)
Reasons for using reinsurance
Catastrophes
Helps prevent risk of insolvency from catastrophes or oter accumulations. Use catastrophe excess of loss or other aggregate excess of loss as appropriate for the class.
Reasons for using reinsurance
Technical assitance
Reinsurers and brokers may provide useful technical services and advice to insurers that are not experienced in a particular class.
Reasons for using reinsurance
New classes
Insurers can get experience in a new class without being exposed to too much risk (although they are unlikely to make much profit)
Reasons for using reinsurance
Regulation
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.
Reasons for using reinsurance
Financial assistance
Via favourable commission agreements (proportional) or through the direct writer hanging on to the gross premium before passing anything on to the reinsurer. Also, using reinsurance as a favourable alternative to capital.
