Clark Flashcards
Facultative reinsurance
Designed and purchased separately for each individual risk of the ceding company
Treaty reinsurance
Single contract allowing reinsurer to cover multiple risks of ceding company
Quota Share reinsurance
Percent of premium and losses ceded is the same across all risks
Surplus Share reinsurance
Designed to retain low risk policies and cede higher risk policies
Surplus percent = max[0%, min(Surplus Lines, IV - Retained Line)/IV]
Per risk XL treaty
Reinsurer assumes losses between a retention and a limit for each risk
Protects cedant from large individual claims
Per occurrence XL treaty
Reinsurer assumes losses between a retention and limit for each occurrence across multiple risks (i.e. CAT reinsurance)
Aggregate XL treaty
Reinsure assumes losses between a retention and a limit for the aggregate of total losses from ceding company
Offers frequency protection
Risks attaching basis
All policies that begin or renew during contract period are covered, regardless of when losses occur
Losses typically on PY basis, related to WP
Losses Occuring basis
All claims that occur during contract are covered, regardless of policy inception
Losses typically on AY basis, related to EP
Experience rating
Used mostly for proportional reinsurance
Uses adjusted historical experience
CAT load applied
Exposure rating
Uses current risk profile and estimated loss distributions to calcluate premium
Differences between surplus share treaty and excess insurance
Once surplus percent is established, reinsurer only responsible for that percent of loss
Experience rating steps
- Compile historical experience
- Exclude CAT/shock losses
- Develop and trend losses, on-level premiums and exposures
- Select expected non-CAT loss ratio
- Insert CAT loss ratio
- Estimate other expenses and CR
Sliding scale commission
Commission paid by reinsurer to ceding company varies with actual LR on treaty
Balanced sliding scale plan
Commission at ELR equals expected commission
Technical Ratio
Loss Ratio + Commission Ratio
Carryforward provision
If actual LR exceeds LR for minimum commission, excess LR removed from minimum commission next year
Approaches to pricing carryforward provisions
- Only apply to current year’s LR (ignores future carryforward potential)
- Look at expected ultimate commission ratio for a block of years together (ignores potential that contract might not be renewed)
Exposure curve
Portion of loss capped at a given percent p of the insured value, relative to the total value of the loss
For XL treaty, portion of expected ground up loss in a layer
P[(Retention + Limit) / IV] - P(Retention / Limit)
Free cover
If there is no loss experience in the highest portion of the layer
Essentially giving away any excess coverage for which there is no loss experience
How to eliminate free cover
Use experience rating for lower portion, then use exposure rating relativities to price higher portion of the layer
Credibility for experience rating
- Expected number of claims or $ of loss during historical period
- Variance of projected loss costs (more stable, more credibility)
Three layers of casualty per occurrence XL treaties
Working layer
Exposed excess
Clash covers
Issues when using RAA data
Report lag can vary by company
Mix of attachment points/limits not cleanly broken out
Data may include A&E claims
WC – may include inconsistent tabular discounts
Treating ALAE
- Included with loss: treat as single amount when comparing to limit and retention
- Pro-rata with loss: Calculate loss covered by treaty; same %age of ground-up ALAE also covered by treaty
Handling ALAE with exposure rating
Swing plans
If losses incurred by the contract increase, so will the premium
Provisional rate is amount paid up front
ELR = average LC / capped retro premium
If ELR <> expense load ratio, plan is not in balance
If provisional rate < capped retro premium, large cash flow advantage to cedant
Reinstatements of property CAT covers
Allows ceding companies to “refill” treaty limit a certain number of times during policy period
Can be pro-rata as to amount or as to time (time not as popular due to seasonality of CATs)
Payback period
Treaty limit / annual premium
Rate on line
Annual premium / treaty limit
Issue with risks attaching treaties
Potential for reinsurer to pay multiple times on same event
Finite risk covers
Multiple year features
Loss sensitive features
Property CAT covers with lower maximum losses
Two conditions for ceding company to consider finite risk covers reinsurance for accounting purposes
Reinsurer assumes significant insurance risk
Reasonably possible that reinsurer may realize a significant loss
Complications in pricing finite risk covers
Reinstatement provisions
Expenses
Carryforwards
Changes in premium/commisions by year of treaty
Cancellation provisions
Exposure rating using ILFs
Expected loss = Prem x ELR x [(ILFa+L - ILFa) / ILFa]
Exposure rate = Expected Loss x ALAE load x “Other” loads
Issues with capping trended losses at policy limits when experience rating
Insureds tend to purchase higher limits over time, so capping may understate future loss potential
Options: Ignore, OR trend limits and losses and assume limits increase at inflation
Disadvantages: Ignoring means historical limits may not reflect selected limits in the future, if trending limits, must “onlevel” premium
