Risk transfer Flashcards
Responses to risk
Transfer
1. Transfer
2. Reduce
3. Avoid
4. Accept with limited financial coverage
5. Split
6. Retain
How to choose mitigation
Frequency
1. Frequency and severity
2. Feasibility of implement
3. Secondary risks
4. Cost and impact on profit
What are the things to consider when thinking of transferring risk.
- Probability of risk occurring
- Risk appetite
- Cost of transferring vs retaining
- Third party willingness
Reinsurance cost
Premium
-loadings - profit and contingencies
Reinsurance benefits
Vliced
1. Reduced claim volatility
* smooth profits
*less cap requirements
*write more business
2. Limit large losses
3. Insolvency
4. Capacity to write larger risks
5. Expertise
6. Data
Benefits of ART
Crusts
- Capital source
- Cheap cover
- Risk management
- Unavailable
- Solvency
- Transfer
- Security (payment)
- Stabilisation of results
Types of ART
- Securitisation
- Swaps
3.post loss funding - Derivatives
- integrated risk cover
Integrated risk cover
Multi-year, multi- line cover
+diversification
+save cost
+save time
+smooth results
+lock into attractive terms
-credit risk
-availability
-Expenses
-structurimh difficulty
Securitization
Transfer insurance risk to capital markets-repay conditional on agreement. An expensive bond. Traditional catastrophe reinsurance
+capital received in advance
+known market capacity
+uncorrelated with market > lower return
+ less ongoing admin
>diversification
-bond might not be liquid
- expected higher return
-information asymmetries
- more admin intensive initially
- might not accommodate new business
Post loss funding (contingent capital)
Securing terms in advance under which capital can be raised following catastrophe.
Typically provided by bank
Put options on share price
Derivatives
E.g catastrophe or weather options
Swaps
Organization with matching but negatively correlated risks can swap packages so each Organization is diversified
Proportional reinsurance disadvantages
*capping the cost of large claims
Excess of loss
*non proportional
*ceding of large covers over certain levels to reinsurer
*reinsurance liability is capped
*excess reverts back to insurer
*can be individual or aggregate basis
*cement has options to purchase extra layers of cover (stacking)
+allows exploit risk
+protects against LOsses
+stabilisation
+Capital use
-premium> expected claims is possible
premium >proportional
Risk excess of loss
*more individual
>one reinsured risk at a time
*similar to surplus is amount claimed for is surplus sum assured
