Responding to experience & reinusurance

Question 1

Why should policyholders expect a lower return than insurer’s cost of capital?

Answer 1

1. Friction cost, cost administration, investment 2. Info asymmetry

Question 2

How to reduce frictional cost

Answer 2

1. Cost of Admin and Investment: Combine investment and mortality risk: GMXB, with-profit 2. Info asymmetry: Different generation of policyholders to exchange forward contract

Question 3

What does Reinsurance company serve like?

Answer 3

Extra capital in protecting against insolvency; Smooth profit for shareholders; Technical and marketing advice and resources

Question 4

Securitization

Answer 4

Transfer risk associated with low frequency/high severity events to the capital markets

Question 5

What is parametric trigger

Answer 5

index trigger. call basis risk - mismatch between losses (insured loss vs. loss triggering recovery)

Question 6

What trigger does reinsurer like?

Answer 6

Indemnity trigger. Certainty of recovery

Question 7

What trigger do investors like?

Answer 7

Parametric trigger. More objective easy to understand

Question 8

What are sidecars?

Answer 8

Financial structure, allow investors to take on the risk and return of business and earn risk and return that *arises from business

Question 9

Types of reinsurance

Answer 9

Facultative and Treaty

Question 10

Falcultative

Answer 10

Separate on each risk

Question 11

Treaty

Answer 11

1. Certain class of business, single contract 2. Obligatory nature

Question 12

Types of reinsurance: amount

Answer 12

Pro rata and excess of loss

Question 13

Pro rata

Answer 13

proportional, insurance amount, premium and loss shared proportionally ceding insurer and reinsurer

Question 14

Excess of loss

Answer 14

Non proportional. Indemnify, exceed specified retention to a certain limit

Question 15

Why “excess of loss” reinsurance and seldom and expensive?

Answer 15

1. Same risk as insurer, more volatile 2. anti-selection, information asymmetry

Question 16

What is a proper alternative to “excess of loss” reinsurance?

Answer 16

ILW (Industry Loss Warranties), stop loss for the industry rather than a specific company

Question 17

Risks in mortage

Answer 17

Financial risk for lenders: pricing, interest rate, asset-liability mismatch; Regulatory, reputation

Question 18

What is policyholder expectations?

Answer 18

Implied guarantees, e.g. capital adequacy and going concern

Question 19

What is actuarial reflection on policyholder expectations?

Answer 19

Value-adding guarantees, equity, Strategic thinking

Question 20

Rapid response -> less capital?

Answer 20

1. A is less risky? 2. Right response? 3. Volatile in the long run

Question 21

Risk with return smoothing

Answer 21

Subjectively reduce volatility, raise Sharpe ratio

Question 22

What is a corridor

Answer 22

Gain or loss >= 10% of PBO or fair value