Reasons to reinsure
- Good value for money
- Lower SCR
- R/S/T arbitrage
- Smooth results
- Reduce variance in morbidity experience vs mean - Avoid large single losses
- Large depends on size of FA available - Diversify risks
- Limit exposure to risk
- May be one single risk or concentration or risks e.g. territory
- Usually surplus - Increase capacity to accept risks including NB
- Usually surplus of XOL
- Solvency requirement should reduce in proportion to that ceded - Financial assistance for NB/FA/M&A
- Usually QS/other proportional
- Commission paid now for share of future expected profits - Expertise
- New risks from NB/unusual risks/territory, low experience
- Assist in pricing/design/u/w/cm
- Low retention to start, increasing with experience
- Usually QS
Types of reinsurance
Proportional
Share the risk (QS/surplus)
Share the premium (OT(Coinsurance)/Risk Premium Re
Non-proportional
Excess of loss
Risk
Agg/SL (£1m over 12 months)
Cat (£1m from single event)
FinRe
Uses of QS
Spread risk Write larger portfolios of risk Encourage reciprocal business Improve solvency ratio New product/ittle experience (expertise) New territory/existing product (expertise)
Disadvantages of QS
Cedes same proportion of risk regardless of size, may want to cede more of the larger risks
Passes share of profit to reinsurer
Uses of surplus
Needs fixed SA at outset
Hence not used in PMI
Increase capacity to accept risks (large ones)
Limit exposure to risk as monetary limit chosen
Uses of non-proportional reinsurance
Cap the cost of large claims (individual/aggregate)
Why wouldn’t long term insurance use non-proportional usually, when might it and what type?
We know the max cost of benefit for long term
Group may have agg xl
What might you have as well as a fixed retention level for XL?
An indexed one, this passes some of the inflation risk BACK TO THE INSURER (not reinsurer)
An upper limit
What product might use Risk/SL/Cat
PMI - individual large losses
Large variation of claims products (not usually LT)
Pandemic, not usually available
Purposes of non-proportional reinsurance (xl)
Allow insurer to accept risks leading to large claims
Large means relative to free assets
Reduce insolvency risk from catastrophe
“ “ from large claim
“ “ from aggregation of claim
Stabilise technical results by reducing claims fluctuation (Smooth results)
Explain financial reinsurance and the 2 methods?
- Improves apparent accounting position of insurer
- Little insurance risk transfer
- Loan is no good as goes on liabilities side too
Method 1.
- To reduce strain of NB financing
- Used in risk premium reinsurance
- Commission paid by reinsurer to finance things like initial commission and expenses
- Part of premiums paid back to the reinsurer (share the premium), this accounts for repayment of commission and lapse risk
Method 2.
- Make use of future profits of EB or NB
- A contingent loan repaid on future profits
- Not repaid if no profit
- May also be used for Improving solvency position after drop in asset value or funding new projects e.g. overseas subsidiary
