Chapter 11: Managing Exposure Flashcards
Do all lines of business experience the same hardening or softening of the market at the same time?
No
Starting from higher profits, what is the typical cycle in the insurance market?
Higher profits leads to... Higher capacity leads to... Lower premiums leads to... Lower profits leads to.... Lower capacity leads to... Higher premiums leads to... Higher profits...and the cycle begins again
How long does a cycle of the insurance market take?
It can be difficult to predict as it depends upon numerous influences
What are some examples of how the cycle of the insurance market may be shortened?
Changes to legislation creating new liabilities
Major disasters such as weather related incidents, NatCats, or acts of terror
Changes to underwriting policy
What is EML?
Estimated Maximum Loss
For which line of business is EML particularly important?
Commercial property and business interruption
Why is estimated maximum loss needed?
The maximum exposure for any one event may not be the same as the sum insured - particularly if the risk is spread across more than one location eg if there are two factories it is unlikely they would both be destroyed by the same event
The EML helps the underwriter decide if the risk is acceptable, how much if any they are willing to take on, and if reinsurance would be desirable
Due to risk accumulation, insurers must be particularly aware of loss exposures arising from what?
Single risks
Single events
What is meant by layering of liability?
If a proposer wishes to take out a policy for a £20 million limit of liability but can only find an insurer willing to accept a limit of liability of £10 million, they may place this £10 million then arrange additional policies with other insurer(s) in excess of this £10 million to reach the £20 million limit they require
ie they may have a primary layer of £10 million and another policy, an excess layer, covering £10 million in excess of £10 million
What is meant by single event exposures?
Exposures to multiple losses arising from the same event eg a natural catastrophe or weather event
What can be done about single event exposures in order to manage the risk?
Take out reinsurance
What is reinsurance?
The underwriter, having accepted a risk, seeks to pass some of that risk on to other insurers or specialist reinsurers to limit their exposure to the risk
What are some of the reasons why an underwriter might want to take out reinsurance?
Protection against single large events or claims
Protection against claim fluctuations from year to year
Limit capacity
Risk is above acceptable levels
Entering a new market
If a claim arises on a policy which the insurer has reinsurance on, who is legally bound to pay for the claim?
The insurer - they are legally bound to pay for losses arising before seeking to claim indemnity under the reinsurance contract
What are the two main types of reinsurance?
Proportional and non-proportional
What are the two sub-categories of proportional reinsurance?
Quota share and surplus
What are the sub-categories of non-proportional reinsurance?
Excess of loss and stop loss (also called excess of loss ratio)
What is proportional reinsurance?
The reinsurer accepts an agreed percentage of the risk to be passed onto them and agrees to pay any losses in the same percentage
What is quota share reinsurance?
An insurer has an agreement (treaty) with a reinsurer applying to all insurances written that comply with the terms of a treaty. The reinsurer will automatically accept liability for their share of any policy written that falls within the treaty
For example if an insurer has a treaty covering 50% of its property line of business, 50% of all policies written would be covered by the reinsurer
What is the main advantage and disadvantage of quota share reinsurance?
Advantage: Easy to administrate which lowers costs
Disadvantage: The insurer cannot be selective about their risk retention - even if they would be willing to retain all of the risk it would still be reinsured and so they would pay a reinsurance premium on it
When is quota share reinsurance normally used?
By new insurers or when a insurer starts to write a new line of business
What is surplus reinsurance?
The insurer only takes out reinsurance on risks that exceed their own retention limit. They take out additional lines of reinsurance equal to the maximum line they wish to retan
eg if a risk is £500,000 but they wish to retain only £100,000 they would take out 4 lines of reinsurance for £100,000 each
What are the main advantages and disadvantages of surplus reinsurance?
Advantage: The insurer can be more selective about when they take out reinsurance
Disadvantages: The cost of administrating this is higher as it requires more active involvement
What is non-proportional reinsurance?
The reinsurer agreed to contribute to all losses exceeding a pre-agreed figure
