Chp 44-47 Flashcards
1) Descriptions of proportional and non proportional reinsurance
a) Proportional reinsurance – reinsurer covers agreed proportion of each risk
b) Non-proportional reinsurance – cost of ceding company capped with liability above certain level being passed to reinsurer
Types of reinsurance
a) Quota share – fixed percentage of each and every risk is reinsured
b) Surplus – treaty specifies retention limit and maximum level of cover available from reinsurer
c) Risk XL – relate to individual losses, affects only one insured risk at any one time
d) Aggregate XL – covers aggregate of losses above an excess point and subject to upper limit sustained from defined peril(s) over a defined period, usually one year, called stop loss when dealing with ceding company’s whole account
e) Catastrophe XL – protection against catastrophe specifying how much reinsurer will pay if catastrophe occurs
3) Reasons for reinsurance
Diversification of risk Expertise Financial assistance Limit exposure to risk Avoid large single losses and concentration of risk Tax advantages (possible) Opportunity to write larger risks/write more new business/fine tune experience/build up experience Rates seem attractive Smoothes profits
4) General costs and benefits of reinsurance
a) Costs – need to pay reinsurance premium, risk that reinsurer unable to fulfill its obligations, foregoing upside potential from taking on risk
b) Benefits
i) Expertise – administration/actuarial services/insurance advice
ii) Avoid large losses
iii) Smooth cashflows
iv) Freeing up capital (initial business strain)
v) Ability to write larger business
vi) Ability to write more business
Discounted covers
provide full cover without immediate need to finance full undiscounted liability, used to manage solvency, risk transfer, and capping losses
Integrated risk covers
arranged between insurers and reinsurers, substitute for debt or equity, used to buy excessive cover, smooth results, lock into attractive terms, often written as multi-year/multi-line covers, give premium savings due to cost savings and to greater stability of results over longer time periods and across more uncorrelated lines
Securitisation
transfer of insurance risk to banking and capital markets, used to manage catastrophe risk since this risk not correlated with market risk and hence benefit to investors, pricing is similar to traditional catastrophe reinsurance
Post loss funding
guarantees that in exchange for a commitment fee funding will be provided on the occurrence of a specific loss, funding is often a loan on pre-arranged terms or equity, commitment fee is lower than equivalent insurance cost because cost of funding is borne after event has happened, before loss happens the contract appears cheaper than conventional insurance
Insurance derivatives
e.g. catastrophe or weather options
Swaps
swap negatively correlated risks for diversification
a) Risk can be diversified within
i) Lines of business
ii) Geographical areas of business
iii) Providers of reinsurers
iv) Investments – asset classes
v) Investments – assets held within a class
8) Definition of underwriting
a) Assessment of potential risks so that each can be charged an appropriate premium
9) Reasons for underwriting (Acronym – SAFER)
Substandard lives (identify and set terms)
Avoid anti-selection
Financial underwriting against overinsurance
Experience in line with expected
Risk classification (set a premium commensurate with risk)
(also consider reinsurers, regulators, claims underwriting)
10) Types of underwriting
a) Medical – assess health of the applicant
b) Lifestyle – leisure pursuits, applicant’s occupation
c) Financial – details of financial health of applicant may be obtained to counter risk of overinsurance
d) Claims underwriting – check if benefit is covered, guard against fraudulent or excessive claims
11) Sources of medical information and how the information is interpreted
a) Questions on proposal form
b) Medical doctor reports
c) Medical examination
d) Specialist medical tests
