Reinsurance Flashcards
(22 cards)
Reasons for using reinsurance
- limitation of exposure to risk
- avoidance of large single risks
- smoothing of results
- availability of expertise
- increasing capacity to accept risk
- financial assistance
Purpose of proportional reinsurance
- reduces the size of the cedant’s net account - used to accept a larger size of risk than would othwise be possible
- allows for reinsurance commission to be payable whereby the insurer’s new business costs or other appetite for revenues is satisfied by “ factoring” in the future margins in premiums to be passed to the reinsurer
Risk premium
- reinsurer sets the premium rate , which is independent of the premium charged by the insurer
- changes in the cedant’s premium rates will not require changes in reinsurance rates - this gives cedant’s greaterr freedom to respond to competitors
- charges a specifi premium for the risk , which may be level over the term or may vary annually with the probability of claim
Risk premium types
- Level - reinsurer spreads the risk premiums so that they are level over the term of the contract - guaranteed or not - insurer can simply load the reinsurance laoding onto the premium rates to obtain premium payable to policyholder
- Increasing yearly risk premiums
- expected cost of claims payable by the reinsurer
- expenses, contingency loadings and profit - Sum at risk reinsurance
- long term controls. Proportional disturbance
- proportions are applied to sum at risk ( SA - reserves ) that cedant’s holds
- benefit is a lump sum , terminating the contract and the reserves are large enough to make adjustment significant
- treaty will stipulate the amounts of reserves from the outset or the basis on which they are calculated
- UL : S@R : excess of benefits over the bid value of units
Risk premium calculation :
- ssessing the likely experience f the business and that it is to reinsurer and then adding expense and profit margin . Additional there may be some form of profit participation - whereby a share of nay profits to the reinsurers from portfolio reinsured is paid back to the cedant
Purpose of quota share
- widely used by insures to spread risk ,
- Write larger portfolios of risk
- encourage reciprocal business
- improves solvency ratio
- helps insurer satisfy statutor solvency requirement
- small or nw insurer or large insurer employ when launch a product covering an area of risk where the insurer is inexperienced
- administration is very straightforward
Disadvantages :
- it cedes the same proportion of each risk , irrespective of size
- it passes a share of any profit to the reinsurer
Surplus cover
Long term insurer
Will cede to the reinsurer all the sums hat exceed its retention on each individual life
- the proportion fo risk ceded will vary from risk to risk - depending on the size oft the sum insured under the policy , in relation to the retention agreed under the treaty
- will apply to policies where there is a fixed sum insured chosen at outset by thehe policyholder
Purpose of non-proportional
- to permit an insurer to accept risks that could lead to large claims
- reduce the risk of insolvency from the catastrophe
- a large claim
- an aggregation of claims
- stabilise technical results of the insurer by reducing claims fluctuations
XoL
Reinsurer agrees to indemnify the cedar for the amoun of any loss above a stated excess point
- reinsurer will cover u to a stated upper limit with the insurer purchasing further layers of XL which stack on top of the primary layer
There types of XoL
- Risk XoL :
- relates to individual losses
- affects only one insured risk at one time - Aggregate XoL
- extension of risk XoL reinsurance
- excess point and the upper limit apply to the aggregation of multiple claims
- stop loss protects the insurer by covering the total losses for th whole account , above an agreed limit for a 12 month peruod - whole account can comprise of one or several classes of insurance
- excess points and upper limits - % of cedant premium income for that account
- short term - Catastrophe XoL
- cover any be defined in terms of a common cause or peril, or single event over a particular period of time
Advanatages and disadvantages of XoL
Advantages
- allows insurer to take on risks that can produce very large claims
- protects against individual large claims
- helps stabilise profits from year to year
- helps make more efficient use of capital by reducing the variance of claim payaments
Disadvantages
- insurer will pay premium to reinsurer , which in the long term will be greater than expected recoveries under the treaty
- An XOL reinsurer’s premium will load the expected claims for expenses, profit and contingency margins
- XoLpremium my be greater than pure risk premium for the cover
FinRE
- improving accounting and solvency position of the cedant
- involve a small proportion or if any of transfer of insurance risk from the cedant to the reinsurer
- manage insurer’s capital position
- not effective under accounting or supervisors regimes where credit can be taken for future profits and or where a realistic liability has to be held in respect of the loan payments
Underwriting
- process of consideration of insurance risk - assessing whether the risk is acceptance and if so setting appropriate premium together with terms and conditions of the cover
Group - nderwrititng
- look for minimum take up rates of th terms offered - to limit the anti-selection ( voluntary)
- ristrictions
- applying exclusions
- setting free cover limits
- ensuring the members are actively at work
- setting take up rates on voluntary schemes
- laying down the take over terms where the insurer accepts a shceme that was previously insured elesewhere
Individual - underwriting
- higher chance of anti-select
1) ** Full medical underwriting**
- most onerous and detailed form of underwriting
- full medical health assessment is performed before the policy is taken out and the premium rate is confirmed
- relatively costly and Tim consuming but gives the insurer greatest opp to learn about the state of the individual health
2) ** MEdical history disregard**
- MHD underwriting , no regard is paid to individuals past medical history and no exclusions to PECS
- less costly and time consuming but greatest potentional for anti-selection so priced accordingly
- common in group PMI
3) ** Moratorium underwriting**
- no formal underwriting
- bus past medical history is examined a the time of claim
- claim any condition other than those PECS in a defined period before acceptance - exclusions for all conditions that have received treatment in a defined eperiod prior to the application
- exclusion is waived after a peiriod of time f the policyholder received no further treatment on the conditions for a defined period.
- PMI , group CI
- encourage sale Sana dreduce new business costs but policy does not only exclude recurrences of PECs but also any condition deitrctly relating to them. So hard for the policyholder to know wha is covered
Medical evidence - full medical underwriting
- Questions on he proposal form completed by the applicant ( demographic information and a series of question on insured medical history ) ( the questions must be factual and not require technical knowledge )
- Reports from medical doctors
- A medical examination a carried out on the applicat at the requirst of the insurer
- Specialist medical tests
Medical underwriting can manage risk
- it can protect an insurance company form anti-selection and in particular lives whose health is impaired that is impossible to assess risk accurately
- medical underwriting process enables the insurers to identify the lives with a substandard health risk for whom special terms must be quoted
- for substandard risks, the medical underwriting proces will identify the most suitable approach and premium level for the special terms to be offered
- adequate risk classification within the underwriting will help ensure that all risks are fairly rates
- medical underwriting will help in ensuring tat the actual morbidity experience does not depart too far form the assumed in the pricing of the contracts
Risk management aimed at PH
- Exclusions
- Co-payments , levies and deductibiles
- Approved network providers
- Preventative medicine and wellness programmes
Risk management at health providers ( PMI )
- Treatment protocols
- Medicine formularies
- Review
- Chronic disease management
- Negotiated fees and fixed payments
- fee for service ( negotiated)
- per diem
- per case - global fee
- capita action
- salary
- incentives to limit cost , coordination or participation : pay for performance, pay for participation
Data checks
- Recording accuracy
- Regular vetting and spot checks
- Controls of data acceptance
- Compulsory fields
- Staff training
To protect its relationship with customer, a beneift provider must
- Monitor the sales message
- Beware of business churning
- Analyses the quality of sales staff
- Beware of over generous commission
- Monitor premiums receipts
- Invest in sales trainings
Managing counterparty risks
- due diligence on the counterparty before selection
- diversification across different counterparties
- single counterparty exposure limits
- restriction on the use of counterarties below a specified credit rating
- credit insurance or derivatives
Regular reports, checks and inspections to make sure that it does not suffer from reputational risks, business risk and security risk
ERM
Risk management framework that considers the risk of the business as a whole , rather than considering insidvidal risks in insoldation
- allows for diversifying effects of risks to e allowed for
- needs to be aware of m assess the overall risk profile it s exposed to based on aggregation of underlying risks , allowing for correlating effects
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