Professional Documents
Culture Documents
What is Reinsurance?
Insurance for Insurance Companies More precisely
Reinsurance transfers insurance underwriting risk to third-party organizations.
Intro-Reinsurance.ppt
Introduction
(Re)Insurance Financial Strategies
Pooling Large number of small risks, where individual premiums inadequate to cover individual losses Funding Individual risks premiums set high enough to cover likely losses (plus expenses and profit) Speculating Large, unique exposure; low chance of loss; potential loss is very high Low enough likelihood that expected return greater than cost of capital
Intro-Reinsurance.ppt
Introduction
(Re)Insurance Financial Strategies
Basic Strategy
Funding
Insurance Example
Dental insurance WC retro
Reinsurance Example
Net account quota
Business Constraints
Processing Leverage Line size limits Spread
Low-Cost Providers
Class of business
share
specialists
Pooling
HO fire Auto BI
Working layers
Diversified
multi-line underwriters
High capital Tolerant of
Speculating
Aggregate
exposure
Volatility
volatility
Price-setters
Intro-Reinsurance.ppt
Insurance Policyholders
Insurance Companies
Reinsurance Companies
Example: Lloyds Of London, Berkshire Hathaway
Brokers
Intro-Reinsurance.ppt
Intro-Reinsurance.ppt
Facultative Reinsurance
Facultative reinsurance applies to an individual risk, i.e., one commercial fire policy or even only one location. Insurer and reinsurer agree to the reinsurance terms on each individual agreement. It is generally used to reinsure:
a) b)
extra-hazardous or unusual risks which might be excluded from treaty reinsurance agreements. high valued risks with policy limits exceeding maximum treaty parameters.
For Property risks, specific information about construction, usage, contents, fire protections and other safety attributes will be assessed by the underwriter. For Casualty exposures, revenue, coverage type, and claims history are key underwriting considerations. Both pro rata and excess of loss forms are used. Facultative premiums are usually based on the ceding companys exposures, not its premium. So, $25 per car, not 2% of Automobile premiums
8
Intro-Reinsurance.ppt
Treaty Reinsurance
Treaty reinsurance applies to an insurance companys entire book of business, such as all commercial fire polices, all automobile policies, all workers compensation policies, all homeowners policies, or, more generally, any combination of the above. Certain risks are inevitably excluded to help define the exposure for the treaty underwriter, who must rely on the capabilities of the ceding carrier in determining the worth of any particular risk. Both pro rata and excess of loss forms are used. Treaty reinsurance premiums is usually set as a percentage of the ceding companies original premiums.
Intro-Reinsurance.ppt
10
Intro-Reinsurance.ppt
11
Intro-Reinsurance.ppt
12
Intro-Reinsurance.ppt
13
Intro-Reinsurance.ppt
14
Intro-Reinsurance.ppt
15
Intro-Reinsurance.ppt
Functions of Reinsurance
There are four main functions of reinsurance
Finance Capacity Stabilization (net income protection) Catastrophe (surplus protection)
Another reason may include product expertise held by the reinsurer, not by the reinsured.
16
Intro-Reinsurance.ppt
Functions: i) Finance
An insurance companys growth may be limited because of unearned premium reserve requirement(s). A company is forced to put all written premium into a UEP reserve account while still paying business (acquisition) costs, (agents commissions must be paid on written premium). The premium on an annual policy is earned at the rate of 1/12th per month. Because acquisition costs must be paid immediately, there can be a substantial drain on surplus, particularly when premium volume is expanding rapidly. The accounting system used by insurance companies is designed to enhance financial strength, with state insurance regulators monitoring such items as the ratio of written premium to surplus. A general rule of thumb used to be 3 to 1, but now 2 to 1 is more often used. A ratio above 2.5 to 1 (varies by Company) could result in a company being viewed as over extended, leading to rating agency action. Pro rata reinsurance enables a company to continue to write polices without draining capital and surplus. It reduces written premium and increases the surplus, by means of a ceding commission recouping pre-paid acquisition expenses.
17
Intro-Reinsurance.ppt
18
Intro-Reinsurance.ppt
19
Intro-Reinsurance.ppt
20
Intro-Reinsurance.ppt
Actuarial Support
Our Mission To offer the best combination of proprietary, commercially available and common-sense tools for our clients to systematically evaluate all of their choices for reinsurance purchasing and risk management.
22
Intro-Reinsurance.ppt
Actuarial Support
Founded in 1940s Ahead of its time 7 employees (over 10% of our workforce) Customized models for each client Relationships with multiple vendors Proprietary original models to supplement weaknesses in vendors models
23
Intro-Reinsurance.ppt
Actuarial Support
Catastrophe modeling
Mapping includes
Vendor-developed cat models, which we license Holborns proprietary Inland Wind Cat model
Dynamic Financial Analysis (DFA) Optimization / risk selection Reinsurance benchmark pricing BCAR What-ifs Risk transfer testing Rating agency questionnaires
24
Intro-Reinsurance.ppt