Chapter 5: Reinsurance products - background

Question 1

Main reasons for reinsurance:

Answer 1

• Limitation of exposure to risk or spreading of risk (single risks, aggregations of single risks, accumulations, multi-class losses) – the need for reinsurance will depend on the size of the insurer, its portfolio, level of free assets, its experience in the marketplace and types(s) of business written.
• Avoidance of large single losses – what is “large will depend on the size of the insurer and the free assets available
• Smoothing of results – reinsurance reduces the potential for fluctuations if losses are subject to increase in number and/or size
• Increasing profitability – reinsurance can increase the opportunity for an insurer to make a profit and plan its business more accurately (increased certainty)
• Improving solvency margin – reinsurance helps an insurer to plan its operations more effectively and strengthen its balance sheet
• Increasing capacity to accept risk (singly or cumulatively) – this can enable the insurer to compete more effectively in the market
• Financial assistance (new business strain, bolstering free assets, merger/acquisition) – the reinsurer can lend the insurer cash now, which will be repaid out of the insurer’s future profits
• Availability of expertise to develop new markets and products – expertise may be needed if the insurer is entering a new market or writing new risks, unusual risks or in new territories

Question 2

Ways of writing reinsurance business:

Answer 2

• Facultative
• Treaty