Friedland Flashcards
Purposes of Reinsurance
Promote Stability
* ceding company retain smaller, more predictable losses and cede losses that are unusual/infrequent
* limits losses from large single event or multiple smaller events
* helps prevent insolvency
Increase Capacity
* allows insurer to take on more risk that they normally wouldn’t because they can cede parts of that away
* helps faciliate competition for small insurers (help them write more business)
Protect Against Catastrophe
* limits losses from large single event or multiple smaller events
Manage Capital and Solvency Margin
* less risk retained means less capital required, can free up capital for other uses/investments
* ceding premium can lower premium to surplus ratio, allowing ceding company to write more business
* ceding commissions (paid from reinsurer to insurer) increases surplus for the insurer
Access Technical Expertise
* Reinsurer can provide expertise to their clients (UW, claims, loss prevention, pricing) to help them manage risk
* Very useful for smaller insurers or those entering a new LOB
Facilitate Withdrawal from a LOB
* If insurer wishes to exit a LOB, they can cede all of the risks to insurer
Business-Covered Clause
Losses Occurring During vs Risks Attaching
Losses Occurring
* covers all losses that occur during the contract period
* doesn’t matter when the underlying policy was issues
Risks-Attaching
* covers all losses on policies with an effective date during the contract period
* doesn’t matter when the loss occurs
Treaty Reinsurance
What is it
- Insurer cedes all business for whatever lines specified in the contract
- Reinsurer agrees to accept all buisiness specified, including policies (not written yet) written during course of the contract
- Insurer acts as underwriters for the reinsurer, reinsurer willing to accept whatever risks the insurer is willing to write
- May be with one or multiple reinsurers spanning one or multiple years
Facultative Reinsurance
- Both reinsurer and insurer have option to accept or reject risks or group of risks
- Often used for high-value and hazardous commercial risks
- Reinsurers may conduct own underwriting to mitigate risk of adverse selection
Treaty/Facultative Hybrid
Automatic, Obligatory, Semi-obligatory, Non-obligatory
Facultative Automatic - reinsurer has limited rights to decline individual risks
Facultative Obligatory - insurer to have option to cede individual risk, reinsurer must accept all
Faculatative Semi-obligatory - insurer can cede risks of a defined class, reinsurer must accept all
Non-obligatory - both reinsurer and primary insurer have option to cede or not cede
Proportional Reinsurance
What is it
- AKA pro rata or participating reinsurance
- Both premium and losses are shared based on ceding percentage
- Reinsurer pays ceding commission to cover primary insurer’s underwriting and servicing expenses
Quota Share
* Reinsurer and insurer both share a % of both premium and losses
* Can be variable quota share - varying ceding % based on risk characteristics
Surplus Share
* Primary insurer sets a line - max policy limit they are retaining
* Reinsurer will cover a % of that loss up to a multiple of that line
Finite Risk Reinsurance
What is it + 2 types
Finite Risk Reinsurance
* Reinsurance that incorporates time value of money
* Usually multi-year contracts - take into account investment income and spread risk over time
* Combines risk transfer and risk financing
* Common in run-off products (M&A, exiting a LOB, WC, asbestos)
Loss Portfolio Transfer
* Reinsurer assumes all or part of future loss payments
* Premium < Ult Loss b/c TVM
* Primary insurer can increase surplus (reserves no longer a liability)
* Covers timing risk - if losses occur earlier than expected, less investment income
Adverse Development Cover
* Also cedes future loss payments but only if they exceed a certain threshold
* Reserves are NOT transfered (primary insurer maintains claim handling)
* Often used in M&A
* Also covers timing risk and adverse development risk
Sufficient and Reliable Data
Why is Sufficient Data Challenging for Reinsurers?
- Different contract terms from one cedent to another and can change from year to year (manuscript nature of reinsurance)
- Causes problems in loss triangles because data is inconsistent
- Operational or strategic changes at a ceding company can also make data inconsistent
Sufficient and Reliable Data
Why is Reliable Data Challenging for Reinsurers
- IT systems at each insurance company caputures data differently and use different terminology
- Similar loss events with different insurers may have different coverages
- Hard for reinsurer to consolidate the data accurately
- Insurers don’t usually reported detailed loss data
- Lag in data reporting to reinsurer
Sufficient and Reliable Data
Why is Reinsurance Data Lagged
- Claims have to be reported to the primary insurer first and THEN to the reinsurer
- May take time for primary insurer to realize claim is going to breach the retention, especially for long-tailed lines
- Primary insurer don’t report frequently to reinsurers
Homogeneous and Credible Data
How do reinsurers segment their data?
What is homogeneous/credible?
Homogenous - grouped data with similar risk characteristics
Credible - predictive value associated with that particular set of data
- LOB (property, casualty, ocean marine, etc)
- Type of contract (facultative, treaty)
- Type of reinsurance cover (quota share, surplus share, XS per risk, etc)
- Primary vs Excess
- Attachment point
- Contract terms (losses occurring, risks attaching, etc)
- Type of primary insurer (small, large, XS and surplus)
Reinsurer Organization of Data
Accident Year Aggregation
What is it? Pros and Cons
Losses are grouped by date of occurrence
Advantages
* Most common method in US/Canada
* Easy to achieve, easy to understand
* Uses a shorter time frame than underwriting (~policy year) year aggregation so ult loss are more reliable sooner
* Easier to adapt to changes in regulation, economy, major loss event
Disadvantages
* Potential mismatch between losses and premiums (calendar year premiums)
Reinsurer Organization of Data
Treaty Year Aggregation
What is it? Pros and Cons
Aka treaty year, similar to policy year for primary insurer
Advantages
* Commonly used in Europe and Lloyds of London
* True match between losses and premiums
* Easier to adapt to underwriting or pricing changes
Disadvantages
* Takes longer for ultimate loss estimates to be reliable
Reinsurance Contract Terms
Losses Occurring vs Risks Attaching
Losses Occurring - covers (primary insurer’s) losses that occur during the reinsurance contract period. Regardless of when the underlying policy was issued
Risks Attaching - covers (primary insurer’s) losses on all policies with an effective date during the reinsurance contract period. Regardless of when the losses occurs
Adjustments for Data Challenges
Changes in Operation and Enviornment
Examples
Examples
* Upgrading policy admin, claims admin systems
* Increasing dependence on big data
* Purchasing other companies / selling parts of their company
* Anything that impacts the target markets of the insurer and UW guidelines
* Changes in legal and economic enviornment
Adjustments
* Leave out discontinued business in the analysis
