Minimum limit of retention stated in of premiums losses ceded varies by policy.
Avoids cessions on small policies.
Better at providing large-line capacity.
More costly to administer.
Used on property risks rarely liability.
Example 25000 retention 250000 limit 150000 Policy 83 100000 Policy 75 17 25 10 Excess of Loss or Nonproportional
Per Risk or Per Policy
Designed to protect against large losses exclude small losses.
Less premium submitted to reinsurer.
Helps to stabilize loss experience.
Example Per Risk
Works well for catastrophes clash cover.
Can trigger even if there are a large number of small claims from one occurrence e.g. storm.
Definition of occurrence important.
Reinsurer typically pays 90-95 of reinsured losses counters moral hazard.
Policy C 60000 Loss 35000
Policy A 8000 Loss Policy B 10000 Loss 25000 11 Functions Summarized 12 Facultative Reinsurance
Reinsurer underwrites each loss exposure individually as submitted with detailed information.
Primary insurers frequently obtain reinsurance commitment (on terms) before they quote a price to the primary insured.
Advantages of Facultative Reinsurance
Addresses exclusions and limits in reinsurance treaties.
Used to protect reinsurance treaties.
Obtain second opinion of reinsurer.
13 Types of Facultative Reinsurance
Functions similarly to surplus share treaty.
Operates like per risk/policy excess treaty.
Used primarily for liability/work comp more recently for property.
1000000 Surplus Share Reinsurers 50 Facultative Reinsurance 40 Primary Co. Ret. 10 Pro Rata Example 100000 500000 400000 14 Layering Reinsurance Example The Safe Insurance Company (SIC) writes homeowners insurance in Florida. It specializes in large expensive homes. Assume that the amount of insurance on each home is 1000000. Summary of SICs Exposures
SIC has the following reinsurance program in place for its homeowners business in Florida
A surplus share reinsurance treaty with Reinsurer A in which SIC retains the first 250000 of losses on each home and Reinsurer A assumes any losses exceeding 250000 up to a limit of 1000000 on each home.
A per occurrence excess-of-loss reinsurance treaty with Reinsurer B with a 100 million retention by SIC and a limit of 400 million.
15 Layering Reinsurance Example cont. A severe hurricane strikes Broward Dade County and Palm Beach counties causing insured losses equal to 40 of total insured exposures in each county. Assume that 40 of the homes insured by SIC are totally destroyed but there are no losses on the other homes insured by SIC. The table below indicates the amount of losses suffered by SIC on a direct (before reinsurance) basis. 16 Layering Reinsurance Example cont.
How much will Reinsurer A pay to SIC according to its reinsurance contract
How much will Reinsurer B pay to SIC according to its reinsurance contract
What will be the amount of losses that SIC will retain after it is paid by its reinsurers
17 Reinsurance Through Pools
Organization of insurers banded together to underwrite reinsurance jointly.
Pro rata treaties for surplus relief will depend on premiums ceded ceding commission.
Retention in excess of loss treaties for stabilizing experience depends on the size of loss insurer can absorb without undue effects on surplus or loss ratio.
Most states limit maximum possible loss on any one exposure to 10 of surplus.
Retain that which is stable and predictable and cede that which is not stable and predictable.
Treaties should be integrated.
21 Setting Reinsurance Limits
Ideally should cover most of the loss exposures of the primary insurer.
Insurer may have target Prob. Max Loss (PML)
Balancing protection against its cost.
Higher layers require higher risk premiums.
22 Reinsurance Pricing
Pro Rata Treaties
Pro rata shares of losses premiums equal.
Ceding commission to primary insurer will vary effectively determines price of reinsurance.
Retrospective commission arrangements can be used to share profits and risk.
Per Risk or Per Policy Excess Treaties
Modeled expected loss p
23 Reinsurance Market
Suppliers include both domestic U.S. reinsurers and non-U.S. reinsurers roughly split the U.S. market for reinsurance.
Some firms solely provide reinsurance others provide both primary and reinsurance.
Reinsurance market subject to cycles fluctuations in supply or capacity and underwriting/pricing.
Historically long-term relationships between primary insurers and reinsurers provided stability.
As relationships have eroded market has become more volatile.
24 Cat ROL Reinsurance Price Index Rate on Line premium paid as of exposure 25 Global Reinsurance Capitalization Source Guy Carpenter 26 Regulation of Reinsurance
U.S. reinsurers alien licensed insurers regulated like primary insurers for solvency
Terms of reinsurance contracts not regulated directly.
State regulators regulate reinsurance through granting of accounting credit.
Credit can depend on contract reinsurer.
Unauthorized reinsurers must post collateral for ceding insurer to get credit.
Conflicts between U.S. and non-U.S. insurers over regulation.
27 Government Reinsurance
State Cat Reinsurance (Florida)
Proposals for Federal Cat Reinsurance
Is there a gap in supply of private reinsurance
Desire to have government subsidize cost of insurance/reinsurance.
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