Reinsurance products - background Flashcards

1
Q

What is reinsurance?

A

Reinsurance is a form of insurance whereby an insurance company obtains for other insurance companies (reinsurers) protection against risk of large losses

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2
Q

What is retrocession?

A

Retrocession is the means by which a reinsurer can cede risks to another reinsurer.
-> Retrocession protection is required when a reinsurer that accepts a substantial amount of reinsurance business needs reinsurance protection itself.

  • > Reinsurer ceding the risk is called “retrocedant”
  • > Reinsurer assuming the risk is called the “retrocessionnaire”
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3
Q

Brokers in reinsurance markets:

A
  • > Primarily fulfill a sales role to find their client - the insurer - suitable reinsurance on insurer’s behalf
  • > In some mkts, reinsurers often deal directly with insurers in placing their reinsurance.
  • > Brokers hence compete with professional reinsurers who offer direct brokering service to clients
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4
Q

What is fronting?

A
  • Fronting occurs when an insurer underwrites risk and cedes all (or nearly all) of it to another insurer (effectively acting as a reinsurer) in exchange for a fee to cover the fronting insurer’s expenses & profit
  • The direct insurer is still liable for claims if the reinsurer defaults so need to assess credit risk of assuming insurer before entering fronting arrangement
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5
Q

Why may an assuming insurer use a fronting arrangement?

A
  • It may not be licensed to write a specific line of business in a particular country
  • Credit rating may be inadequate to satisfy the insured’s minimum requirements; for example because the insurer suffered a downgrade just prior to renewal
  • May be tax advantages in issuing the policy via the fronting insurer
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6
Q

Factors the fronting insurer might consider when assessing credit risk:

A
  • Size
  • Solvency level
  • Attitude / strength of management
  • Existence of a parent company
  • Types of business written
  • Level of expertise / experience with different classes of business
  • Prevailing regulation should be considered before entering into a fronting arrangement
  • Fronting insurer would be well advised to get a letter of credit from the risk-bearing party to provide collateral
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7
Q

What is a captive?

A

A captive insurance company is a subsidiary insurance company established to self-insure insurance risk of the parent.

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8
Q

Why purchase reinsurance?

A
  • Limitation of exposure to risk or spreading of risk
  • Avoidance of large single losses
  • Smoothing of results (especially for relatively
    immature portfolios)
  • Increasing profitability
  • Improving solvency margin
  • Increasing capacity to accept risk
  • Financial assistance
  • Availability of expertise
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9
Q

What sorts of risks can reinsurance limit exposure to or limit the spreading of?

A
  • Single risks
  • Aggregations of single risks
  • Accumulations of risks
  • Multi-class losses
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10
Q

Accumulations of risk

A

Accumulation of risk may be :

  • An accumulation by geographic location eg areas that are prone to floods
  • An accumulation by peril eg asbestos related claims for employers’ liability
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11
Q

Factors which affect insurer’s need for reinsurance:

A
  • Size of the insurer
  • Insurer’s experience in the marketplace
  • Insurer’s available free assets
  • Size of the insurer’s portfolio or individual line of business being protected
  • Range within which the business outcome (or profit) can be forecast with confidence
  • Cost and availability of reinsurance
    -> After particularly large losses, reinsurance cover
    may be restricted or prohibitively expensive
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