Chapter 0.3: Reinsurance

Question 1

Reasons for using reinsurance?

[7]

Answer 1

SA(D)LIIFE

• Smoothing of results
• Avoidance of large single losses
• Limitation of exposure to risk
• Improve solvency margin
• Increase capacity to write risk
• Financial assistance
• Expertise

Question 2

What are the advantages [4] and disadvantages [3] of a treaty arrangement?

Answer 2

Advantages
- Automatic coverage if within agreed scope
- Economies of scale can make treaty reinsurance more cost-effective
- Encourages long-term relationships between the reinsurer and ceding company
- Provides a predictable level of risk mitigation and financial stability for the ceding insurer

Disadvantages:
- Less flexibility since treaty terms apply uniformly
- Risk of reinsuring low-risk policies that might not need reinsurance, leading to unnecessary costs
- Blanket Coverage Constraints

Question 3

What are the advantages [4] and disadvantages [4] of a Quota Share arrangement?

Answer 3

Advantages
- Spreads risk and increases underwriting capacity
- Directly improves the solvency ratio without losing market share
- Administratively straightforward
- Provides commission that helps with cash flows

Disadvantages
- Cedes the same proportion of low and high variance risks
- Cedes the same proportion of risks, irrespective of size
- Passes a share of any profit to the reinsurer
- Is unsuitable for unlimited covers

Question 4

What are the advantages [5] and disadvantages [2] of a Surplus arrangement?

Answer 4

Advantages:
- Enables the insurer to fine-tune its experience
- Enables the insurer to write larger risks
- Is useful for classes where wide variation can occur in the size of risks
- Helps to spread risks
- May provide commission that helps with cashflow

Disadvantages:
- Requires more complex administration
- Is unsuitable for unlimited covers and personal lines cover

Question 5

What are the advantages of a XoL arrangement?

[4]

Answer 5

Advantages:
- 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 so smoothes results)
- Helps to make more efficient use of capital.

Question 6

What are the advantages [3] and disadvantages [2] of a Stop Loss arrangement?

Answer 6

Advantages:
- Provides broad protection against aggregate losses
- Helps in budgeting and financial planning by establishing a maximum loss threshold
- Especially beneficial in volatile underwriting environments

Disadvantages:
- Premiums can be high due to the extensive coverage offered
- The attachment point may result in the insurer retaining significant losses before the coverage activates

Question 7

What is a stability clause?

Answer 7

A clause that may be included in a non-proportional reinsurance treaty, providing for
the indexation of monetary limits (that is, the excess point and/or the upper limit) in line
with a specified index of inflation

Question 8

List the 4 types of financial reinsurance

Answer 8

• Time and distance cover
• Spread loss covers
• Financial QS
• Industry loss warranties

Question 8

What is a time and distance reinsurance cover?

Answer 8

The insurer pays the reinsurer a premium and in return, the reinsurer pays an agreed schedule of claim payments

Question 9

What is a spread loss cover?

Answer 9

The insurer pays an annual or single premium to the reinsurer for the coverage of specified claims

Question 10

List 2 kinds of run-off reinsurance

Answer 10

• Adverse development cover
• Loss portfolio transfers

Question 11

What is adverse development cover?

Answer 11

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.

Question 12

What is loss portfolio transfer cover?

Answer 12

Involves 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.

Question 13

Factors that determine an insurer’s use of reinsurance?

[14]

Answer 13

• Financial strength of Reinsurers
• Availability and cost of reinsurance
• Classes of business written, size and range of risks and their volatility
• Alternatives to reinsurance (coinsurance or protection afforded by parent company)
• Size of the insurer’s free reserves
• Size (total premiums) and diversification of the insurer’s portfolio
• Extent to which accumulations of risk are possible
• Regulatory requirements
• Impact of Capital management
• Need for Technical assistance
• Financial Objectives
• Underwriters’ influences
• Risk appetite and tolerance
• Reinsurers’ requirement for a Minimum retention
• Relationships with reinsurers and Brokers