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
12) Examples of special terms to offer to substandard lives
a) Addition charged to the premium
b) Deduction made from the benefit
c) Exclusion clause
13) How claims control systems can reduce risk
Mitigates consequences of financial risk,
guard against fraudulent or excessive claims
14) How management controls can reduce risk
a) Data recording – NB that company holds good data on all risks it insures
b) Accounting and auditing – enable proper provisions to be established, regular premiums to be collected
c) Monitoring liabilities taken on – protect against aggregation of risks of specific type to unacceptable level
d) Options and guarantees – care needs to be taken when offering options and guarantees
15) How risks associated with options and guarantees can be controlled
a) Liability hedging – choosing assets in such a way as to perform in same way as liabilities e.g. immunisation
b) Option pricing – suitable tradable assets do not always exist in practice
16) Definition of capital management
a) Insuring provider has sufficient solvency and cashflow to enable both its existing liabilities and future growth aspirations to be met in all reasonably foreseeable circumstances
17) Reasons why individuals need capital
Survive financial consequences of unexpected event,
build up capital,
save for large future expense
18) Reasons why corporations need capital
a) Cushion against fluctuating trade volumes, build up funds for a planned expansion, trading companies need capital to finance stock and work in progress, start-up capital for premises/staff/equipment before they can start in business
19) Reasons why financial providers need capital (Acronym – REG CUSHION)
Regulatory requirement to demonstrate solvency
Expenses of launching a new product/starting a new operation
Guarantees (write business containing) as higher solvency margin required
Credit rating may depend on it
Unexpected events cushion e.g. adverse experience, fines
Smooth profit and improve balance sheet solvency
Help demonstrate financial strength to customers and sales intermediaries (to attract new business)
Investment freedom to mismatch in pursuit of higher returns
Objectives/opportunities, e.g. mergers and acquisitions
New business strain financing
20) Reasons why state needs capital
a) Build up and maintain reserves (gold or foreign currencies) to support fluctuations in balance of payments and in economic cycle, short-term funds needed for timing differences between government income and outgo
