Untitled Deck Flashcards
3 Main types of excess of loss reinsurance
Risk XL, Aggregate XL, Catastrophe XL
Risk XL
Indemnifies an insurer for the amount of an individual loss in excess of the excess point - in return for a premium.
Aggregate XL
Relates to cumulative losses, where the aggregation may be by event, by peril or by class.
Catastrophe XL
A form of aggregate XL covering severe losses (within the hours clause) that result from a specified event.
4 Advantages of Excess of loss
- Allows the insurer to accept risks that could lead to large claims
- reduces the risk of insolvency from a large claim, an aggregation of claims or a catastrophe
- reduces claim fluctuations (and smoothes results)
- helps to make more efficient use of capital by reducing the variance of the claim payments (thus reducing capital requiremets).
Working layer
The first layer above the cedant’s excess point, where moderate to heavy loss activity is expected by the cedant and reinsurer.
Indexed limits
Where inflation has a significant effect on the cost of claims, a stability clause may be applied to the excess point.
Commission on XL Re
Return commission and override commission are not normally relevant (since the reinsurer charges a premium to cover the risk, and commission would effectively just lower the premium). Profit commission is possible (in the lower layers).
Deductibles on XL
It is possible the reinsurer will cover only a proportion of the claims within the layer, by applying a deductible.
Define “Hours clause”
A clause within a catastrophe reinsurance treaty that specifies the limited period during which claims can be aggregated for the purpose of one claim on the reinsurance contract.
Stop loss
A form of XL reinsurance that indemnifies the cedant against the amount by which its losses incurred during the specific period exceed either a predetermined monetary amount or a percentage of the company’s subject premiums (loss ratio) for the specific period.
2 Types of financial reinsurance funding arrangements
Pre-funded arrangements, Post-funded arrangements
Pre-funded financial re arrangement
The insurer pays premiums into a fund held by the reinsurer (which earns interest), and claims are paid from the fund.
Post-funded financial re arrangement
The reinsurer pays the losses and the insurer pays back the losses over time.
4 Specific financial reinsurance products
Time and distance deals, spread loss covers, financial quota share, industry loss warranties.
Time and distance policies
The insurer pays the reinsurer a premium and in return, the reinsurer pays an agreed schedule of claim payments; this has the effect of discounting the reserves of the insurer for the time value of money.
Spread loss covers
The insurer pays an annual or single premium to the reinsurer for the coverage of specified claims; these may be used to provide liquidity and security to the insurer and may be used for catastrophes.
Financial quota share
This is quota share purchased in order to obtain reinsurance commissions for financing assistance.
Industry loss warranties
These are a type of reinsurance that pay out based on industry losses rather than losses to individual insurers.
Run-off reinsurance
Focus on the full-scale transfer of reserve development risks. It provides cover against the insurer’s earning volatility arising from past activities.
6 Circumstances in which run-off solutions are commonly sought
Corporate restructuring, mergers and acquisitions, closing lines of business, economic changes in the value of the liability, regulatory, accounting or tax changes, legal developments.
Adverse development cover
Involves the purchase of reinsurance cover for the ultimate settled amount of a block of business above a certain pre-agreed amount. Reserves are maintained by the insurer.
Loss portfolio transfers
Involve the purchase of reinsurance cover for the ultimate settled amount of a block of business in its entirety. Reserves are transferred to the reinsurer along with all remaining exposure to the business.
Define “novation”
The transfer of the rights and obligations under a contract from one party to another.
2 Advantages of Loss portfolio transfers
They can improve the credit rating of the original insurer. The new insurer will gain diversification if not already in this area and achieve a larger client database.
4 Disadvantages of Loss portfolio transfers
Assets may need to be realised to pass across the value of the reserves to the accepting insurer, if the new insurer defaults, this could damage the reputation of the original insurer, the transfer may require the buy-in of reinsurers where there are existing reinsurance arrangements covering the portfolio, there will be an associated cost to the original insurer of the risk transfer.
