Reinsurance products - background

Question 1

What is reinsurance?

Answer 1

Reinsurance is a form of insurance whereby an insurance company obtains for other insurance companies (reinsurers) protection against risk of large losses

Question 2

What is retrocession?

Answer 2

Retrocession is the means by which a reinsurer can cede risks to another reinsurer.
-> Retrocession protection is required when a reinsurer that accepts a substantial amount of reinsurance business needs reinsurance protection itself.

• > Reinsurer ceding the risk is called “retrocedant”
• > Reinsurer assuming the risk is called the “retrocessionnaire”

Question 3

Brokers in reinsurance markets:

Answer 3

• > Primarily fulfill a sales role to find their client - the insurer - suitable reinsurance on insurer’s behalf
• > In some mkts, reinsurers often deal directly with insurers in placing their reinsurance.
• > Brokers hence compete with professional reinsurers who offer direct brokering service to clients

Question 4

What is fronting?

Answer 4

• Fronting occurs when an insurer underwrites risk and cedes all (or nearly all) of it to another insurer (effectively acting as a reinsurer) in exchange for a fee to cover the fronting insurer’s expenses & profit
• The direct insurer is still liable for claims if the reinsurer defaults so need to assess credit risk of assuming insurer before entering fronting arrangement

Question 5

Why may an assuming insurer use a fronting arrangement?

Answer 5

• It may not be licensed to write a specific line of business in a particular country
• Credit rating may be inadequate to satisfy the insured’s minimum requirements; for example because the insurer suffered a downgrade just prior to renewal
• May be tax advantages in issuing the policy via the fronting insurer

Question 6

Factors the fronting insurer might consider when assessing credit risk:

Answer 6

• Size
• Solvency level
• Attitude / strength of management
• Existence of a parent company
• Types of business written
• Level of expertise / experience with different classes of business
• Prevailing regulation should be considered before entering into a fronting arrangement
• Fronting insurer would be well advised to get a letter of credit from the risk-bearing party to provide collateral

Question 7

What is a captive?

Answer 7

A captive insurance company is a subsidiary insurance company established to self-insure insurance risk of the parent.

Question 8

Why purchase reinsurance?

Answer 8

• Limitation of exposure to risk or spreading of risk
• Avoidance of large single losses
• Smoothing of results (especially for relatively
  immature portfolios)
• Increasing profitability
• Improving solvency margin
• Increasing capacity to accept risk
• Financial assistance
• Availability of expertise

Question 9

What sorts of risks can reinsurance limit exposure to or limit the spreading of?

Answer 9

• Single risks
• Aggregations of single risks
• Accumulations of risks
• Multi-class losses

Question 10

Accumulations of risk

Answer 10

Accumulation of risk may be :

• An accumulation by geographic location eg areas that are prone to floods
• An accumulation by peril eg asbestos related claims for employers’ liability

Question 11

Factors which affect insurer’s need for reinsurance:

Answer 11

• Size of the insurer
• Insurer’s experience in the marketplace
• Insurer’s available free assets
• Size of the insurer’s portfolio or individual line of business being protected
• Range within which the business outcome (or profit) can be forecast with confidence
• Cost and availability of reinsurance
  -> After particularly large losses, reinsurance cover
  may be restricted or prohibitively expensive