Florians Lectures Flashcards

Question

Reinsurance typology

Answer 1

* Ratio can be fixed (quota share) or variable (other proportional reinsurance) * Price is expressed in the reinsurance commission * Reinsurer participates in all losses incurred (claims & premiums are shared)

Answer 2

* Ratio can be fixed (quota share) or variable (other proportional reinsurance) * Price is expressed in the reinsurance commission * Reinsurer participates in all losses incurred (claims & premiums are shared)

Answer 3

Primary Insurer: * Calculates premium including acquisition & administration costs * Cedes part of the original premium including the portion attributable to costs to the reinsurer Reinsurer: * Reimburses the costs via commission * Pays % of losses Characteristics: * Fixed percentage 0

Answer 4

* Sharing of losses is based on the actual loss suffered * Determination of the price based on historical loss experience (experience pricing) and the expected loss burden (exposure pricing) * Participation of the reinsurer occurs when the reinsured risk is effectively affected by a loss and the latter exceeds the deductible of the primary insurer * Certain threshold (on the balance sheet)

Answer 5

* For each policy I (i=1…n) the part of Sl (surplus) above a specified amount is reinsured * Maximum exposure kept by the primary insurer is called retention R (or line) * R is the same for all n policies * The surplus S in excess of R is ceded to the reinsurer (S is a multiple of the line) * Curbs exposure to larger single risks (make portfolio more balanced) * Most common form of proportional reinsurance

Answer 6

9 Lines Concept * The "9 lines" means that the reinsurer covers 9 times the primary insurer's retention: 300,000×9=2,700,000 This matches the reinsurer's share of the sum insured (2.7m). * Sum Insured: The total insurance coverage is 130,000. * Premium: The premium is calculated as 1.5‰ (1.5 per thousand) of the sum insured: Premium=130,000×0.0015=195\text{Premium} = 130,000 \times 0.0015 = 195Premium=130,000×0.0015=195 * Losses: The total losses amount to 80,000. * Retention Limit: The primary insurer’s retention remains at 300,000. Since the total sum insured (130,000) is less than the retention limit, the reinsurer does not participate in this case. * 9 Lines Limitation: Although the reinsurer’s liability is typically limited to 9 times the retention amount, this does not come into play here because the total risk is already below the retention.

Answer 7

Pros * Limits the primary insurer’s exposure to the single largest risks in its portfolio * Thus, surplus reinsurance allows balancing the portfolio * High flexibility, since retentions can be set at various levels depending on the type of risk, the size of a risk, and the primary insurer’s overall risk appetite Cons * Compared to quota share reinsurance, surplus reinsurance is associated with a more complicated and costly treaty administration * Losses below the retention must be fully borne by the primary insurer * Losses above the maximum surplus require additional facultative reinsurance

Answer 8

Main aspects * Indemnification for those single losses in the portfolio that exceed the retention 𝑅𝑅 * Cover extends to all policies defined in the terms of the treaty * Reinsurer’s exposure is limited by the reinsurance cover or layer 𝐿𝐿 * Additional annual limit for the total amount of covered claims may apply * Effective mitigation against large single losses (e.g., destruction of expensive buildings) * Inadequate protection against high frequency risks or loss accumulation across policies

Answer 9

Main aspects * Covers aggregate losses on an insurance portfolio caused by a single event * As for XL/R reinsurance, the reinsurer bears a layer 𝐿𝐿 above the retention 𝑅𝑅 * The primary insurer retains the part of the total portfolio loss below 𝑅𝑅 * Mitigation against cumulated losses from the same cause, such as a catastrophe (“CatXL”) * Example: hurricane leads to a high number of losses in a property insurance portfolio * Often combined with XL/R reinsurance

Answer 10

Main aspects * Reinsurer fully covers any part of the total annual loss that exceeds the deductible 𝑅𝑅 * Provides most comprehensive level of coverage, but usually a technical loss is required: − aggregate losses + administration costs > aggregate premiums − Ensures that the insurer does not relax its underwriting standards * Allows to smooth earnings through a protection against large annual loss fluctuations * Least frequent form of non-proportional reinsurance

Answer 11

Pros - Protection against extreme single and accumulated losses - Retain a higher proportion of the original premium - Lower administration costs for both insurer and reinsurer Cons - Smaller losses below the deductible are not reinsured - Reinsurer prices risk: need to provide data for complete portfolio - Lack of loss sharing above the absolute deductible may lead to reckless underwriting by the insurer

Answer 12

* An insurer needs to forecast future claims payments to determine its underwriting profit * While doing so, it is important to distinguish two different types of losses: normal losses and CAT losses

Answer 13

1. Loss ratio: A low loss ratio suggests strong underwriting profitability, but may indicate overly restrictive pricing or inadequate coverage, while a high loss ratio indicates that a high proportion of premiums is spent on claims, which could signal unprofitable underwriting or increased risk exposure. Expense ratio: A low expense ratio indicates efficient cost management relative to premiums, while a high expense ratio reflects high operating costs (inefficiency in underwriting, marketing, and/or administration). Combined ratio: Break-even if 100%, positive UW result if <100%; negative UW result if >100% 2. Performance measurement, pricing and reserving, (peer) benchmarking, regulatory monitoring 3. Expenses are not taken into account, short-term focused, not adjusted for the underlying risk

Answer 14

Loss ratio p&c 70% health 70% Expense ratios 25% health 20% combined 95% health close to 90%