Responding to experience & reinusurance Flashcards
Why should policyholders expect a lower return than insurer’s cost of capital?
- Friction cost, cost administration, investment 2. Info asymmetry
How to reduce frictional cost
- Cost of Admin and Investment: Combine investment and mortality risk: GMXB, with-profit 2. Info asymmetry: Different generation of policyholders to exchange forward contract
What does Reinsurance company serve like?
Extra capital in protecting against insolvency; Smooth profit for shareholders; Technical and marketing advice and resources
Securitization
Transfer risk associated with low frequency/high severity events to the capital markets
What is parametric trigger
index trigger. call basis risk - mismatch between losses (insured loss vs. loss triggering recovery)
What trigger does reinsurer like?
Indemnity trigger. Certainty of recovery
What trigger do investors like?
Parametric trigger. More objective easy to understand
What are sidecars?
Financial structure, allow investors to take on the risk and return of business and earn risk and return that *arises from business
Types of reinsurance
Facultative and Treaty
Falcultative
Separate on each risk
Treaty
- Certain class of business, single contract 2. Obligatory nature
Types of reinsurance: amount
Pro rata and excess of loss
Pro rata
proportional, insurance amount, premium and loss shared proportionally ceding insurer and reinsurer
Excess of loss
Non proportional. Indemnify, exceed specified retention to a certain limit
Why “excess of loss” reinsurance and seldom and expensive?
- Same risk as insurer, more volatile 2. anti-selection, information asymmetry
What is a proper alternative to “excess of loss” reinsurance?
ILW (Industry Loss Warranties), stop loss for the industry rather than a specific company
Risks in mortage
Financial risk for lenders: pricing, interest rate, asset-liability mismatch; Regulatory, reputation
What is policyholder expectations?
Implied guarantees, e.g. capital adequacy and going concern
What is actuarial reflection on policyholder expectations?
Value-adding guarantees, equity, Strategic thinking
Rapid response -> less capital?
- A is less risky? 2. Right response? 3. Volatile in the long run
Risk with return smoothing
Subjectively reduce volatility, raise Sharpe ratio
What is a corridor
Gain or loss >= 10% of PBO or fair value
