Reinsurance Flashcards
What is XL reinsurance?
- reinsurer indemnifies the cedant for losses above a stated excess point
- aims to protect insurer against large adverse fluctuations in claim costs
- helps to write large individuals risks that might lead to large claims.
- helps to stablise profit and avoid financial ruin.
What is facultative reinsurance?
- An individual arrangement where an insurer approaches a reinsurer to reinsure part of a specific risk.
- The reinsurer is not obligated to accept the risk and the insurer is not obligated to reinsure their business.
- Each risk is considered seperately at the time it is written.
- Very appropriate if insurer only wants to transfer large risks.
- Advantages
- Flexibility of both parties.
- It can be used to cover risks that fall outside of treaty e.g. too large or unusual risk characteristics
- Disadvantages
- Time consuming and expensive process
- Insurer cannot take on risk unless willing reinsurer agrees to take on risk, this might take a long time.
- Might struggle to find suitable reinsurance e.g. wrong price or unsuitable terms
What factors do you need to consider when deciding if you need reinsurance or not?
- The size of the insurer
- Its experience in the marketplace
- Its available free assets
- The size of its portfolio (Larger portfolio -> the more credible past claims experience -> more predictable business outcome)
- The degree to which it is felt that the business outcome is predictable within bounds
How is the retention level determined?
Approach 1
- Set the retention level at such a level as to keep the probability of insolvency below a specified level
- Using a stochastic model for expected claims rates and a model of the business, expected claims can be projected forward together with the value of the company’s assets and liabilities
- By simulation, a retention level can then be determined such that the company stays solvent for e.g. 995 out of 1000 runs.
Approach 2
1. The cost of financing an appropriate risk experience fluctuation reserve, and
2. The cost of obtaining reinsurance - the reinsurer naturally incorporates an expense and profit loading in its reinsurance terms and the cedant incurs admin expenses
- As retention level increases, (1) will increase and (2) will decrease. A retention level can be adopted that minimizes (1) + (2).
- To calculate (1) - simulation approach used above would probably need to be used to determine the reserve that the company needs to hold.
What are is the purpose of non-proportional reinsurance?
Here just think about XL reinsurance. The purpose is to: be able to write larger risks, avoid risk of insolvency due to catastrophic event, protection against series of losses
What are the reasons for not reinsuring?
- Insurer already has enough diversification by class or by territory
- No large risks have been accepted
- The insurer has large free reserves
- Insurer not listed so stable results are not required
- Insurer does not need technical or administrative assistance
- Financial support is available from parent company
- Insurer has not possible exposure to catastrophe
- No possible arbitrate opportunities.
How can reinsurer minimise the risk they’re exposed to?
- Renewable reinsurance rates.
- Make sure underwriting procedure/marketing up to scratch.
- Reinsurance terms can be conditional and modifiable.
- Reinsurer can only offer cover on poriton of risk about insurer’s retention.
- Reinsurer could consider maximum sum insured it will accept on “obligatory” basis and make the rest “facultative”
- Add margins for uncertain morbidity/mortality rates, and expenses and profit.
What is original terms vs risk premium reinsurance?
-original terms reinsurer shares in insurers premium and claims
- early lapse risk and investment risk shared by to reinsurer
- risk premium reinsurance, premium set independently with expected experience and negotiated profit margin and expense margin
- reinsurance premium doesn’t depend on OP so insurer can respond quickly to competition
- reinsurance premium applied to portion of SA or SAR (can be level, increasing or once off ito sum at risk reinsurance)
What is QS vs. surplus reinsurance?
- both are proportional reinsurance arrangements
- QS: a % of each risk in scope of treaty is passed onto reinsurer
+ solvency ratio improve by same proportion
+ easy to calculate and administer
+ spreads risk to insurer (reducing parameter risk)
+ finance new business strain - does not protect against volatility
- profits shared with reinsurer
- Surplus: insurer cedes all losses that exceed retention limit to reinsurer
+ write larger risks
+ reduce claims volatility - less control over parameter risk
- less suitable for financing arrangements
What is “deposits back”?
- requires by supervisory authorities
- reinsurer deposits back their share of reserve
- eliminated default risk to reinsurer
- increases investment risk but able to make better investment returns
- balance sheet improves for both
- reinsurer doesn’t have to invest in unfamiliar market
What is risk premium reinsurance?
- Definition: A method where the reinsurer sets the premium rate independently of the premium charged by the insurer.
- Types of risk premium reinsurance:
- Level risk premiums: reinsurer spreads risk premiums evenly over the contract term
- Increasing yearly risk premiums: each year’s risk premium represents the expected cost of claims payable by the reinsurer during the year
- Sum-at-risk reinsurance: proportions are applied to the sum at risk (excess of the benefit over the reserve held by the cedant)
- The reinsurer determines its risk premium rates by assessing the likely experience of the reinsured business and adding expense and profit margins.
- There may be a profit participation arrangement, where the reinsurer shares a portion of its profits with the cedant.
What is Risk XL reinsurance?
- Relates to individual losses
- Good match for when loss amount is unknown e.g. PMI
- Loss if covered if it breaches an agreed limit (excess point) up to the maximum cover amount.
- Alternatively, only portion of loss is covered if it exceeds the excess point.
- Cannot be applied to fixed benefit insurances e.g. cash plans or long term insurance, because we know the individual loss amount beforehand.
- Excess point might be index linked to reflect expected inflation.
What is Aggregate XL reinsurance?
- Covers the total losses for the whole account above an agreed limit up to detachment point, over period of a year.
- Whole account could be one class of business or multiple classes of business
- Excess point and upper limit often expressed as % of cedant’s premium income for that account
- Amount payable under contract assess after any other individual reinsurance recoveries has been made
- Can apply to contracts where the benefit amount is known e.g. cash plans or LT insurance.
- Usually used for short term insurance where claims can be very volatile.
- Important for group insurance because all employees work in same place, so there can be increased incidence of large aggregate claims due to the non-independence of some individual health risks.
- Not that suitable for LT insurance because usually not volatile enough to require this type of reinsurance.
What is Catastrophe XL reinsurance?
- Covers losses related to a single event
- Single event needs to be large enough to be solvency threatening.
- Single event needs to be high severity but low frequency.
- Losses during specified period covered e.g. 72 hours.
- Very appropriate for group insurance given there is a concentration of risk (via employees all being in one place), risk of many claims from one event is higher.
What is financial reinsurance?
- Risk premium reinsurance: “loan” presented as a reinsurance commission, with “repayments” added to reinsurance premiums
- Contingent loan (surplus relief reinsurance): loan repayment contingent upon future profits generated by the business
