Reinsurance
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First reinsurance transaction
Definition of reinsurance
Definition of retrocessionaire
Reasons for reinsurance
Treaty reinsurance
Facultative reinsurance
Reasons for facultative reinsurance
Proportional reinsurance
Nonproportional reinsurance
Quota Share
Advantages of Quota Share
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Transfer of insurance risk from one insurer to another through a
contractual agreement under which the reinsurer agrees, in return
for a reinsurance premium to indemnify the primary insurer for
some or all of the financial consequences of the loss exposures
covered by the reinsurance contract.
Reinsurance on reinsurance
1. Improve the portfolio of insured's underwritten
-Reinsurer experience
-Global scale
-Risk divided into smaller parts
-Catastrophe coverage
2. Increase underwriting capacity
3. Decrease expenses
-Ceding commissions
-All policies subject to specific criteria are automatically subject to
reinsurance. E.g. all homeowners or fire insurance policies in a
given geographic area. Policies are not looked at on an individual
basis.
For business not subject to treaties.
-Negotiated on case by case basis primary insurer provides de-
tailed information on each exposure. Therefore expensive
-May be signal of adverse selection
1. Treaties have exclusions- such as property like bridges, art
museums, nuclear facilities, tunnels, etc.
2. To protect treaties. Ceding co wants to write a large/unusual risk
but does not want to strain treaty relationships with a large loss for
that risk.
3. Treaties have limits (e.g. maximum $ loss on one risk or for all
losses accumulated together). To get additional coverage faculta-
tive coverage must be used.
4. Reduce exposure in a given geographic area (e.g., Homeowner
insurance in Florida)
Premiums AND losses are split in an agreed upon proportion.
Reinsurer is responsible only for the losses that are above a
threshold level or a retention level. The retention level is called the
point of attachment.
The premiums and losses are split in the same proportion. The
proportion "a"
Loss (CC): a* (Total Loss)
Loss (RE): (1-a)* (Total Loss)
1. Provides surplus relief- reduces the strain on surplus from new
business
2. Ceding insurer receives a ceding commission. May be relatively
compared to other types of reinsurance. Reason is that reinsurer
doesn't have to worry much about moral hazard. Reason is that the
ceding co. shares in every loss. When a flat commission %, there
may be a profit-sharing or contingent commission that depends
upon the loss ratio. Negotiated at the end of the policy if the
reinsurer makes a good profit on the business.
3. Protect from underwriting mistakes. Ceding insurer may be
 Reinsurance
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Disadvantages of Quota Share
Surplus Share
Advantages of surplus share
Disadvantages of surplus share
Working cover or working excess treaties
Advantages of excess of loss reinsurance
Disadvantages of excess of loss reinsurance:
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worried about changes in losses (liability). This can be important
if the ceding co. is starting to write business in a new line.
4. Useful in dealing with inflation. Unexpected inflation makes
losses higher for cedent, but reinsurer shares in the inflated losses
1. Losses may accumulate to a large amount of money E.g., if
higher frequency/ severity of losses. No limit on aggregate losses
to the ceding co.
2. No catastrophe protection.
3. Giving up profitable business
Proportionate split between premiums and losses which varies
directly with the amount o the individual policy. No sharing of
losses less than a specified percent-saves administrative cost.
Usually used for property insurance only.
CC: (line limit/policy face) * Loss
RE: No. of lines* line limit/policy face
1. Provides some surplus relief. Ceding commission is lower than
for quota share. Partly because the maximum loss for the ceding
co=line limit. For Quota share the maximum is the % *face value
2. Primary insurer pays small claims which do not have much of
an impact on the portfolio. Avoids administrative losses (avoids
"trading dollars")
3. Provides some large line capacity. Primary shares is limited to
line limit and then the primary can reinsure the necessary number
of lines to get enough capacity. If maximum loss occurs, then the
CC is responsible for only the line limit.
4. Some protection from inflation. Inflation would have a tendency
to push claims up over the line limit, but the ceding co. is respon-
sible for a maximum equal to the line limit. Better protection than
under quota share.
1. Higher overall administrative expense than quota share- be-
cause proportions reinsured vary with face values of the policies
2. Does not protect primary from interdependent or catastrophic
claims which can accumulate to large losses - The line limit would
have to be paid on each policy, and this can accumulate to a large
amount of money. But, better catastrophe protection than from
quota share.
-Excess of loss per risk treaties with low retentions
-Retention varies by type of insurance (e.g., retention would be
different for property versus liability). Usually used for liability
insurance.
1. Stabilizes loss experience by eliminating large losses. Reinsurer
pays losses above attachment point.
2. Aids in catastrophe better than quota share.
3. Provides capacity for large lines- risk of very large losses are
passed on to the reinsurer.
1. Reinsurance has upper limit.
2. No ceding commission.
Reinsurance
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Catastrophe Excess of Loss
Per Occurrence Excess of Loss
Extracontractual damages
Excess of policy limits losses
Aggregate Excess of Loss
Stop Loss (Excess of Loss Ratio)
Clauses in reinsurance treaties
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-Protects cedent from an accumulation of retained losses that
arise from a single catastrophic event.
-Payments from reinsurer to primary insurer for catastrophe losses
reduce the reinsurance coverage available for future losses, ex-
cept a provision is usually included to pay an additional premium
called the reinstatement premium to reinstate the limits of the
agreement after a loss.
-Applies to losses from any one event and usually applies to
liability insurance. Protects primary company from interdependent
claims.
-Clash cover - Liability exposures; reinsurance combination of
liability lines of business (e.g., workers compensation, general
liability)
Pure risk cover - Clash cover for liability and catastrophe excess
of loss expected to cover only rare events (not designed to cover
claims commonly covered by other types of reinsurance).
Primary insurers also use clash cover when they want protection
from
extracontractual damages - and
excess of policy limits losses
Damages awarded to an insured as a result of an insurer improp-
erly handling a claim. The improper behavior is referred to as "bad
faith". "bad faith" losses are not covered by any reinsurer unless
the policy explicitly says so
Results when a reinsurer sues an insurer for failing to settle a
claim within the insured's policy limits when the primary insurer
had a chance to. So the primary insurer is responsible for the
excess losses. Reinsurance covers this only if the reinsurance
policy explicitly says so.
-Can be used for property or liability
-Aggregation usually covers an aggregation of losses above the
attachment point. An aggregation takes place over a stipulated
period of time such as a year. This reinsurance is not limited
to when there is a catastrophe or specified events occurs. This
reinsurance includes catastrophes/occurrences plus unforeseen
accumulations of losses during the specified time period.
-Applies to the company's aggregate results (company wide or for
a specific line)
-Not common, usually used for crop, hail, and small insurance
companies. It is also useful for catastrophes.
-Usually the reinsurer agrees to pay some percent of excess
claims above the point of attachment, usually 90-95%.
-Utmost good faith - Full disclosure of all material facts about the
subject of the agreement
-Statistics clause - If info provided by the cedent is too optimistic,
then the reinsurer has the right to revise the premium
-Stabilizing clause - Allows the point of attachment (the retention
level) to be revised for inflation.
-Reinstatement clause - after a loss, the cedent must pay the
premium again to get the limit reinstated. The premium paid is not
the full premium.