Reinsurance Products 2

Question 1

List several risks relating to the direct writer’s operations that the reinsurer would face if they made stop loss available

Answer 1

1. the direct writer’s premiums may be under-priced (e.g. a competitive market)
2. poor underwriting by the DW
3. poor premium rating structure leading to adverse selection
4. poor claims experience (eg CAT and/or large claims)
5. generally adverse claims experience (i.e. random events)
6. poor claims controls

Question 2

Why would a DW not want stop loss in practice?

Answer 2

The reinsurer would need to charge the DW a very high premium to cover themselves against the risk

Question 3

What responses to the risks imposed by stop loss may the DW find favourable?

Answer 3

1. set up tight internal controls to ensure good premium rating, underwriting and claims control
2. buy particular types of RI to guard against specific events (buy individual XoL and CAT XoL as needed)

Question 4

Explain why reinsurers are often not prepared to offer stop loss?

Answer 4

1. the reinsurer has limited control over initial underwriting and claim payments made
2. historically some stop losses have been loss making

Question 5

What conditions might a reinsurer impose before providing stop loss cover?

Answer 5

1. impose a deductible so the DW retains a proportion of the risk
2. maintain some control over underwriting, premium rates and claims

Question 6

Why is stop loss arranged on a losses occurring basis?

Answer 6

Stop loss cover protects the direct writer against many claims arising over an accounting period
For a company using normal accident year accounting the corresponding exposure period is the accident year.
Hence a losses occurring basis would be used, except when using funded accounting eg at Lloyd’s when a policies incepting basis would be used