IF3.11 Managing exposure

Question 1

market Cycle

Answer 1

Higher profits -> high capacity for that class -> lower prices -> lower profits -> capacity withdrawn -> higher prices

Question 2

What effects the length of the market cycle

Answer 2

economic factors, changes in the law and other external influences

Question 3

What shortens a market cycle?

Answer 3

• amendments to legislation (results in new liabilities)
• More onerous legislation can extend liabilities
• Weather-related incidents e.g. floods
• Major disasters e.g. hurricanes or terrorism

Question 4

What can loss of exposures arise from?

Answer 4

• single risks
• single events

Question 5

What are the options if the Estimated maximum loss (EML) is greater than the insurers acceptability limit

Answer 5

• purchase reinsurance
• co-insure the risk

Question 6

Estimated Maximum Loss (EML)

Answer 6

the maximum loss from a single event, 100% loss is unlikely in most cases.

Question 7

Layering of limits of liability

Answer 7

purchasing multiple policies for the same thing to get the total liability limit you require, if the limit is high some insures will not single handedly accept the risk

Question 8

Reinsurance

Answer 8

When an insurer takes out insurance on a risk they’re covering

Question 9

Why do underwriters seek reinsurance?

Answer 9

• protection of the account against a single large event or a large claim on a single item
• protection of the company capital
• protection against fluctuating claims costs from year to year.
• operational capacity (insure beyond their capacity)
• entering a new market
• building up the account
• minimising loss impact on income generated
• underwriters peace of mind
• sharing heavy/hazardous risks

Question 10

What happens if reinsurance fails?

Answer 10

The insurer must pay out the claim themselves in full

Question 11

Two types of reinsurance

Answer 11

proportional & non-proportional

Question 12

Proportional reinsurances

Answer 12

the insurer and reinsurer share the premiums and the claims proportionately

Question 13

proportional reinsurances: quota share

Answer 13

an agreed proportion of all insurances written by an insurer will fall within the treaty i.e. a set quota , e.g. 30%, of the insurance contract is reinsured.

Question 14

positives of quota share reinsurance

Answer 14

easy to administer

Question 15

cedant

Answer 15

original insurer

Question 16

proportional reinsurances: Surplus

Answer 16

The insurer only reinsures those risks where the sum insured exceeds its own retention limit.
The insurer will purchase additional lines equal to the line it is able to write (maximum retained line).

aka the insurer decided the retain £x of the risk. They then set up a y-line surplus treaty of reinsurance so they can now accept x+xy worth of risk.

Question 17

maximum retained line

Answer 17

the line of the insurance the insurer is able to write

Question 18

Non-proportional reinsurance

Answer 18

a reinsurer agrees to contribute to losses exceeding a specified figure for a premium negotiated with the insurer.

Question 19

Non-proportional reinsurance: Excess of Loss

Answer 19

the ceding office pays the first £x of any loss and the reinsurer pays up to £y in excess of £x

can be written on a per risk or per event basis.

Question 20

Excess of loss per risk

Answer 20

Often there are multiple layers for a number of claims.

Question 21

Non-proportional reinsurance: Stop Loss (excess of loss ratio)

Answer 21

used when insurers want to protect their loss ratio and step it exceeding y%.
The reinsurance pays x% of losses in excess of y%.

So if premiums recieved = a and losses made = b
then the reinsurer pays (b * y%)* x% if y is above the agreed threshold.

Question 22

Faculative reinsurance

Answer 22

reinsurance is purchased for an individual risk

Question 23

retrocedant

Answer 23

a reinsurer is obtaining reinsurance themselves.

Question 24

retrocession

Answer 24

A cession where the entity ceding is already a reinsurer.

Question 25

To cede

Answer 25

to act of sharing the risk with reinsurers.

Question 26

In the result pf an increased capacity for underwriting risks, the price of insurance would be expected to….

Answer 26

fall

Question 27

What is the earliest stage an insurer can claim under a reinsurance contract?

Answer 27

Once the insurer has paid the insureds claim