Chapter 30.3-30.5 - risk transfer/reinsurance Flashcards
What is facultative reinsurance?
One reinsurance arrangement per policy (case-by-case) basis. Normally for large financial risks.
What is a reinsurance treaty?
Reinsurance arranged for a defined group or series of risks.
What is proportional reinsurance?
Under a proportional reinsurance arrangement, the reinsurer covers an agreed proportion of each risk. The two main forms are:
Quota share - constant proportion covered for all risks
Surplus - proportion varies depending on the risk being covered (EML)
Both forms need to be administered automatically and therefore require a treaty.
An insurer enters in a x% reinsurance treaty on a group of policies. If the claim amount is y on that group of policies over the term of the reinsurance contract, write and expression for the reinsurance recovery over the term.
x% * y
What are the uses of quota share reinsurance?
Spread risk
Write larger portfolios of risk
Encourage reciprocal business (see p. 11 for definition of reciprocal quota share reinsurance)
Outline the advantages and disadvantages of quota share reinsurance relative to other forms of reinsurance.
Advantages:
Easy to administer, as it is written by treaty and a constant proportion of risk is ceded.
Helps to diversify risk, because the reinsurer can write more business for the same amount of capital
Disadvantages:
Same proportion of risk is ceded regardless of potential claim size
Same proportion of risk is ceded regardless of volatility/risk profile
No cap on potentially very large claims
What is surplus reinsurance.
A surplus reinsurance treaty specifies a retention level and a maximum level of cover available from the reinsurer.
The proportion of risk ceded is then used in the same way as for quota share.
The retention level could be the same for all risks in a group of policies, or could be specified for each individual risk.
A direct writer reinsures a group of policies with an EML of E. If they choose a retention limit of R and the total claims on the policies for the year is S, write and expression for the reinsurance recovery amount.
(1-R/E) * S
Note the size of S does not matter, so it can be larger than E.
See also the example questions on p. 13&14
Outline the advantages and disadvantages of surplus reinsurance relative to other forms of reinsurance.
Advantages:
Allows direct writer to accept larger risks
It helps the direct writer to spread risks
It is flexible
Disadvantages:
More complex administration due to the need to assess and record separately for each risk the amount to be ceded.
Does not cap the cost of very large claims
