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INTODUCTION TO REINSURANCE

INTODUCTION TO REINSURANCE. NOLAN ASCH CAS RATEMAKING SEMINAR INT-7. INSURANCE. The insurer insures the individual or the corporation. REINSURANCE. The REINSURER insures the insurance company. REINSURANCE PLACEMENT MECHANISMS. DIRECT BROKER. INSURANCE vs. REINSURANCE.

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INTODUCTION TO REINSURANCE

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  1. INTODUCTION TO REINSURANCE NOLAN ASCH CAS RATEMAKING SEMINAR INT-7

  2. INSURANCE The insurer insures the individual or the corporation

  3. REINSURANCE The REINSURER insures the insurance company

  4. REINSURANCE PLACEMENT MECHANISMS DIRECT BROKER

  5. INSURANCE vs. REINSURANCE • BOTH concerned with future contingencies • BOTH require underwriting skills (risk) • BOTH involve transfer of risk • BOTH require payment of premium • BOTH provide protection • BOTH subject to (some) regulation

  6. REINSURANCE • Buyers assumed to be knowledgeable • Responds to actual loss • Provides indemnification only • Reimburses for payments already made • Usually Global

  7. FUNCTIONS OF REINSURANCE • CAPACITY

  8. CAPACITY • Single Risk (FAC WTC) • PORTFOLIO (TREATY)

  9. CAPACITY MECHANISMS • Excess-of-Loss • Quota Share

  10. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE

  11. CATASTROPHE • QUOTA SHARE • EXCESS OF LOSS • SECURITIZATION

  12. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE • STABILIZATION

  13. STABILIZATION Reduction in Variance (swings)

  14. STABILIZATION Extreme contractual case “STOP-LOSS” Aggregate Excess

  15. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE • STABILIZATION • FINANCING

  16. FINANCINGReducing Liabilities Ceding Commissions “Overrides”

  17. FINANCING May increase PHS due to transaction

  18. FINANCING Finite Reinsurance...... but ALL Reinsurance is Financial

  19. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE • STABILIZATION • FINANCING • ENTER AND EXIT MARKETS

  20. ENTER OR EXIT MARKETS Lessens risk as you learn With 100% Q/S you exit

  21. FUNCTIONS OF REINSURANCE • CAPACITY • CATASTROPHE • STABILIZATION • FINANCING • ENTER AND EXIT MARKETS • UTILIZE REINSURER EXPERTISE

  22. USING REINSURER EXPERTISE Large or unusual claims Large or unusual risks Special relationships and/or knowledge

  23. LIMITATIONS OF REINSURANCE • Will NOT make bad business profitable • Transaction Costs • Rating Agency Impacts (Gross/Net)

  24. How Reinsurance Is Pricedin Practice Hypothetical Examples

  25. NO PRICE REGULATION • (virtually)

  26. CASE BY CASE

  27. NEGOTIATION

  28. FLEXIBILITY IN STRUCTUREContractual

  29. EXCESS OF LOSS

  30. LAYERING

  31. $19.75 Mill xs $0.25 Mill (sounds like a wide layer)

  32. 250 xs 250 500 xs 500 1M xs 1M 3M xs 2M 5M xs 5M 10M xs 10M Price A Price B Price C Price D Price E Price F TYPICAL LAYERING

  33. High Frequency/ Low Severity Buffer layers ie 250 xs 250

  34. LOW FREQUENCYHIGH SEVERITY Capacity Layers ie 10m xs 10m

  35. CLIENT/BROKERNEGOTIATION Change or resubdivide the layering

  36. Pricing for 500 xs 500 Later, request the 250xs 250 LAYER TRAPMANY PERMUTATIONS

  37. at “last minute” Ask for 150 xs 100 --Requires more data LAYER TRAP

  38. PRICING TRAPS • AGGREGATE ANNUAL DEDUCTIBLES

  39. ASSUME A 10% RATE • Request a 1% AAD • Request a 2% AAD • Request an 8% AAD • NOW the risk/variance • becomes LARGE vs a 2% rate

  40. INFORMATION FOR PRICING NO standards

  41. WHAT THE REINSURER WANTS EVERYTHING

  42. WHAT THE BROKER/CLIENTMAY WISH TO SUPPLY NOTHING

  43. POSSIBLEOUTCOMES

  44. GIGO Garbage-In Garbage-out

  45. EL NIÑO

  46. NINO Nothing-in Nothing-out

  47. EXPERIENCE RATING Using losses of the risk to price the risk.

  48. STANDARD All losses at half the attachment point & up

  49. ACTUARIAL APPROACH DETRENDED LOSSES Varies with age of claim BEGINS to show ACTUAL CLAIMS as a sample outcome

  50. EXPOSURE RATINGAttempt to rate Reinsurance based upon the TRUE underlying exposures Proxies for TRUE exposures: Limits Profiles = Subject Premium by policy limit Exposures by policy limit ( still not the TRUE exposure)

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