Chapter 6: Reinsurance products - types

Question 1

Main types of proportional reinsurance

Answer 1

• Quota share
• Surplus

Question 2

Advantages of Quota share reinsurance

Answer 2

• Spreads risk, increasing capacity and encouraging reciprocal business
• Directly improves the solvency ratio without losing market share
• Is administratively simple
• May provide commission that helps with cashflow

Question 3

Disadvantages of Quota share reinsurance

Answer 3

• Cedes the same proportion of high and low variance risks
• Cedes the same proportion of risks irrespective of size
• Passes a share of profits to the reinsurer
• Is unsuitable for unlimited covers

Question 4

Advantages of Surplus reinsurance

Answer 4

• 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 the risk
• Helps to spread risk
• May provide commission that helps with cashflow

Question 5

Disadvantages of Surplus reinsurance

Answer 5

• Requires more complex administration
• Is unsuitable for unlimited covers and personal lines cover

Question 6

Main types of non-proportional (excess of loss) reinsurance

Answer 6

• Risk excess of loss
• Aggregate excess of loss – aggregation may be by event, peril or class
• Catastrophe excess of loss

Question 7

Advantages of Excess of loss reinsurance

Answer 7

• Allows insurer to accept risks that could lead to large claims
• Stabilises technical results of the insurer by reducing claims fluctuations
• Reduces the risk of insolvency from a large claim, an aggregation of claims or a catastrophe
• Helps make more efficient use of capital

Question 8

Disadvantages of Excess of loss reinsurance

Answer 8

• In the long term, if priced correctly, the premiums paid to the reinsurer will be greater than the expected recoveries under the treaty

Question 9

Typical features of financial reinsurance:

Answer 9

• Limited assumption of risk by the reinsurer
• Multi-year contract term
• Explicit inclusion of investment income in the contract
• Sharing of the results with the cedant
• Risk transfer and risk financing are combined

Question 10

Financial (or finite risk) reinsurance products

Answer 10

• Time and distance deals
• Financial quota share
• Spread loss covers
• Industry loss warranties

Question 11

Run-off solutions are sought in circumstances such as:

Answer 11

• Corporate restructuring
• Mergers and acquisitions
• Closing lines of business
• Economic changes in the value of the liability
• Regulatory, accounting or tax changes
• Legal developments

Question 12

Run-off reinsurance solutions:

Answer 12

• Adverse development covers
• Loss portfolio transfers

Question 13

Advantages of loss portfolio transfers

Answer 13

• Can improve credit rating of original insurer
• The new insurer gains diversification if not already in this area and achieves a larger client base
• The new insurer (if a specialist in this area) could run off such portfolios more profitably

Question 14

Disadvantages of loss portfolio transfers

Answer 14

• Assets may need to be realised to pass the value of the reserves to accepting insurer which is important if there’s a mismatching or if tax gains/losses could be crystalised
• If the new insurer defaults, this could damage the reputation of the original insurer
• The transfer may require the buy-in of reinsurers where there are existing reinsurance arrangements covering the portfolio
• There’ll be an associated cost of the risk transfer which will depend on the current risk appetite of the market. This cost would be any premium payable plus the “lost” investment income