Reinsurance

Question 1

List the main types of life insurance reinsurance

Answer 1

Facultative
Treaty
- facultative / obligatory
- obligatory / obligatory

1) Original terms
- individual surplus
- quota share
2) Risk Premium
- individual surplus
- quota share
3) Excess of loss
- catastrophe
- stop loss
4) Financial

Question 2

Reinsurance on original terms

Answer 2

The insurance company sets the premium, and the reinsurance premium is in direct proportion to this. The amount of commission agreed with the reinsurer sets the price of the reinsurance arrangement, and is usually very significant

Question 3

Reinsurance using a level risk premium approach

Answer 3

The reinsurer sets a level premium for its share of the risk, based on its share of the full sum assured. The insurer then calculates its own premium rate in the knowledge of the reinsurance premiums it will be paying. The reinsurance commission is usually not significant

Question 4

Risk premium reinsurance

Answer 4

The reinsurer sets the reinsurance premium rate. The risk premium operates as a recurring single premium, with each premium covering the immediate period of risk. The reinsurer my cover a part of the full sum assured or a part of just the sum at risk. The risk premiums will vary from period to period due to changes in the sum at risk, age of policyholder, or as a result of rate reviews. The reinsurance commission is usually not significant

Question 5

What is the aim of catastrophe reinsurance?

Answer 5

To reduce the potential loss to the cedant due to any non-independence of the risks insured

Question 6

VIF

Answer 6

The value of the profits from the in-force business

Question 7

Contingent loan

Answer 7

Reinsurer provides a loan to the cedant, but repayment is contingent on the stream of future profits emerging. Should future experience be poor, the cedant does not have to repay the loan. This type of Fin Re improves the capital position of the cedant by increasing assets without a corresponding increase in liabilities

Question 8

Reinsurance treaty

Answer 8

A legal contract governed by contact law, which includes international trade and shipping agreements and a large body of case law.

Question 9

Reinsurance

Answer 9

An arrangement whereby one party (the reinsurer), in consideration for a premium, agrees to indemnify another party (the cedant) against part or all of the liabilty assumed by the cedant under one or more insurance contracts.

Question 10

List three ways to set the retention level, M

Answer 10

1) M such that it keeps the probability of insolvency suitably low

2) M to aim for a probability that the loss in any one period does not exceed a proportion of the earnings of the business is suitably high

3) Set M to minimise [a+b], the sum of
a = the cost of financing an appropriate mortality fluctuation reserve
b = the cost of obtaining reinsurance

Question 11

Retention limit

Answer 11

The maximum amount of risk retained by the cedant on any insurance contract

Question 12

List the considerations before reinsuring

Answer 12

1) The cost of reinsuring
2) Counterparty risks
3) Legal risks
4) Type of reinsurance most suitable
5) Amount to reinsure

Question 13

List the three methods to determine the rentention limit

Answer 13

1) Stochastic simulation - reinsurance only
2) Stochastic simulation - reinsurance and fluctuations reserve
3) Financial economics approach using efficient investment frontiers

Question 14

List two alternatives to reinsurance

Answer 14

1) Setting up a mortality fluctuations reserve
2) Decline high sum assured business to avoid payout fluctuations

Question 15

List a cedant’s reasons gor reinsuring

Answer 15

1) Limit the amount paid on any particular claim
2) Limit total claims payout
3) Reduce risk of insolvency
4) Reduce parameter risk
5) Reduce claim payout fluctuations
6) Reduce new business strain
7) Reduce overall capital requirements
8) Allows insurer to write more risks
9) Allows insurer to write bigger risks
10) Receive technical assistance
11) Increases profits, return and RoC
12) Benefitting from regulatory arbitrage and tax arbitrage
13) Separate out different risks from a product
14) Allow aggregation of risks the insurer cannot manage on its own, so enabling the insurer to still write the business

Question 16

List general factors to take into account when setting the rentention limit

Answer 16

1) Expected distribution of benefit for the product and average benefit level
2) The insurer’s risk appetite
3) The level of the insurer’s free assets
4) The importance of a stable free asset ratio
5) The terms on which reinsurance can be obtained, and the dependence of such terms on the rentention limit
6) The level of familiarity of the company with underwriting the business concerned
7) The effect on the company’s regulatory capital requirements of increasing or decreasing the rentention limit
8) The existence of a profit-sharing arrangement in the reinsurance treaty
9) The cedant’s rentention on its other products
10) The nature of an future increases in sums assured

Question 17

List the two ways in which the proportion reinsured can be determined under proportional reinsurance

Answer 17

1) Individual surplus
2) Quota share

Question 18

List the factors that the type of reinsurance chosen will depend on

Answer 18

1) The reason the cedant is using reinsurance
2) The forms of reinsurance available in the market
3) The cost of reinsurance
4) The types of business sold by the cedant
5) The legal conditions applying

Question 19

List the three circumstances that will move a company to reinsure more

Answer 19

1) Increased uncertainty about future mortality experience
2) Increased variance in the SA distribution
3) Reduced acceptable probability of future insolvency