Chapter 30 Flashcards
(14 cards)
Name the reasons for reinsurance
- Smooth profits (Income related)
* Protects against impact of v.large individual claims
* Protects against poor experience in a class of policies
* Smooth results by removing cyclical variability on results
o Little knowledge on a new class of business, or small amount of business can’t use LLN
o Also by removing cyclical variability of results like disability (depends on economic cycle)
* Removal of concentration risk
* Catastrophe protection also a capital advantage (reciprocal reinsurance comes in here, but you can also reinsure into the international market, especially for earthquake risks) - Capital efficiency
* Capacity allows the taking on more risk or bigger individual risks
* Financing usually of new business strain
o You wouldn’t want to borrow money from a bank instead bc it increases your L, so it has an offset effect
o So reinsures with pay you reinsurance commission, then they pay you the PV of the new business strain over the lifetime of the business
o Then you put that into reinsurance prem into pricing
o You don’t have to pay back that money, so if there are fewer lapses than they expect, they make profits, if opposite, they take on that risk
* Balance sheet efficiency- can reduce/ remove a key risk (like lapse)
o If lapse is their biggest risk, they would have to set up capital for that risk, which isn’t capital efficient
o Lapse reinsurance treaty instead
o So protect against lapse risk above a certain percent, you buy protection against 2 std devs from the expected lapse for cedant
* Regulatory arbitrage
o Used to work as : you’re an insurance company, then for mortality risk you need to hold 200k, but in Bermuda, for same amount of risk they only have to hold 100k
o This is where solvency II comes in, you now need to hold difference too
o Reinsurers are usually more capital efficient bc they have greater diversification by geo, lob, everything cheaper cost of capital you also get capital efficiency from reinsurance but that would not be regulatory arbitrage - Expertise
* Pricing
o Assistance with pricing, they don’t actually give you data
o They would advice you on how they would price that risk, so reinsurance rates rather
* Underwriting (processes and underwriting manual)
o Bc reinsurance are the best at looking at substandard risk, they understand mortality at non-standard risks
* Claims assessment
* Internation best practice
o Source of being able to find out about internation best practice, most important in the past, before google
Secondary reasons for reinsurance
* Risk diversification through retrocession (often reciprocal)
* To exit old, closed lines of business
o Allow companies to exit legacy lines so that you don’t have administrative burden
* Makes it easier to enter new business or product line
* Tactical- to take advantage of competitive reinsurance rates
How to choose a reinsurer?
- Look at its credit rating, from the credit rating body that insurer trusts , S&P, moodys , best, etc
- To look at size of company and how much business they write, you look at their market value, market cap
- Geographic diversification
- To look at their diversification, look at their balance sheets and income statements to look at what lines of business they write, the geography, etc.
- Length of time in business (age/ resilience of the company)
- Strength and skills of management
- Ability to raise new capital if needed = how to measure this?
o Look at where it’s listed, cause that’s where they raise more capital
o Listed of where investment wealth of the world, they will be more able
o Shares and rights issue - Regulatory regime
Define XL reinsurance
Non-prop cover where the cost to a ceding company of such large clams is capped with the liability above a certain level being passed to the reinsurer, subject to any upper limits
Define risk XL
Type of XL reinsurance that related to individual losses. It affects only 1 insured risk at any one time.
Define aggregate XL
Covers the aggregate of losses, above an excess point and subject to an upper limit, sustained from a peril (or perils) over a defined period. When a major class of business or all perils for whole account are covered = stop loss
Define catastrophe XL
Provides coverage for v high aggregate losses arising from a single event. There is usually an hour’s clause
In what ways can risks be transferred by product design?
- Policy excess or deductibles
- Maximum claim amount
- Unit-linked
How to decide how much risk to transfer
Depends on:
* P(risk event occurring ) and E(loss given occurrence)
* Cost of transferring the risk
* Availability of risk transfer method
What are the advantages and disadvantages of proportional reinsurance
Pros:
Simple to administer
+ benefits of reinsurance
Cons:
Proportion doesn’t vary by volatility or size of risk
Share of profit ceded to reinsurer
Not flexible (oblig-oblig)
May not cover very large claims
Why is reciprocal quota share reinsurance not a good idea?
Benefit from each others business while still trying to beat each other in the market
Have to share loss data, pricing data, underwriting info, etc.
If one company underwrites poorly, they both share the losses, not great if one has poor standards
Pros and cons of surplus reinsurance
Pros:
* Flexible (can be treaty or fac)
* Allows direct writer to write larger risks without ceding profits on smaller risks
* Helps tailor the actual experience = cover can differ based on size and volatility or risk
+ Benefits of reinsurance
Cons:
* May forget to reinsurer if fac-fac
* May not even cover large risks in full
Pros and cons of XL reinsurance
Pros:
Can take on risks that could produce v large claims (caps losses)
Protects against individual/aggregated large claims
Helps stabilise profits from year to year
Helps make effective use of capital bc lower claims volatility
Cons:
Premium paid usually > expected recoveries bc of v.high risk
Name the different types of ART
Integrated risk covers
Securitisation
Post loss funding
Insurance derivatives
Swaps, longevity swap
Define risk financing
Ascertaining likely cost of each risk incl. cost of mitigation and cost of retaining each risk. Ensuring the org has enough resources to recover after risk event occurs
