IF3.11 Managing exposure Flashcards
market Cycle
Higher profits -> high capacity for that class -> lower prices -> lower profits -> capacity withdrawn -> higher prices
What effects the length of the market cycle
economic factors, changes in the law and other external influences
What shortens a market cycle?
- 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
What can loss of exposures arise from?
- single risks
- single events
What are the options if the Estimated maximum loss (EML) is greater than the insurers acceptability limit
- purchase reinsurance
- co-insure the risk
Estimated Maximum Loss (EML)
the maximum loss from a single event, 100% loss is unlikely in most cases.
Layering of limits of liability
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
Reinsurance
When an insurer takes out insurance on a risk they’re covering
Why do underwriters seek reinsurance?
- 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
What happens if reinsurance fails?
The insurer must pay out the claim themselves in full
Two types of reinsurance
proportional & non-proportional
Proportional reinsurances
the insurer and reinsurer share the premiums and the claims proportionately
proportional reinsurances: quota share
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.
positives of quota share reinsurance
easy to administer
cedant
original insurer
proportional reinsurances: Surplus
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.
maximum retained line
the line of the insurance the insurer is able to write
Non-proportional reinsurance
a reinsurer agrees to contribute to losses exceeding a specified figure for a premium negotiated with the insurer.
Non-proportional reinsurance: Excess of Loss
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.
Excess of loss per risk
Often there are multiple layers for a number of claims.
Non-proportional reinsurance: Stop Loss (excess of loss ratio)
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.
Faculative reinsurance
reinsurance is purchased for an individual risk
retrocedant
a reinsurer is obtaining reinsurance themselves.
retrocession
A cession where the entity ceding is already a reinsurer.
To cede
to act of sharing the risk with reinsurers.
In the result pf an increased capacity for underwriting risks, the price of insurance would be expected to….
fall
What is the earliest stage an insurer can claim under a reinsurance contract?
Once the insurer has paid the insureds claim
