Reinsurance

What is reinsurance?

 A tool for insurer to pass their insurance risk

 Example:
 An insurer with SA = £ X
 A reinsurer has a share of that policy & will pay out as a claim is made, say £Y (where Y <= X)
 A retro-cessionaire (reinsurer of a reinsurer) has a share as well, and pay out £T where T<=Y

 Reinsurance can be based on SA or sum-at- risk (SaR)

 Sum-at-risk = Sum assured – Reserve at time t
 Purpose

1. Limitation of exposure to risk

2. Avoiding large losses
3. Smoothing of results (profits or dividends)
4. Expertise available
5. Increasing capacity to accept risk
6. Financial assistance
7. Arbitrage
8. Cheaper rates of RI available
9. Improve credit standing in market
10. Diversification of risk
 Purpose (1)

Limitation of exposure to risk

 Protect from uncertain future
 Protect from accumulation / concentration of risk

Avoid large single losses

 Protection from insolvency (provide liquidity)

Smoothing of results
 Mitigate claim fluctuations (smooth accounting YoY)
 Reduce variance of expected morbidity/ claim experience
 More predictable results for insurer, s/h & regulators
 Write large no. of small risks (diversification)
 Purpose (4)

Increasing capacity to accept risk (more VoB)

 Singly and Cumulatively
 SCR and MCR are reduced in line with proportion ceded
 Surplus treaty / XL appropriate
 Quota share: used to reduce MCR
 Capacity to write large cases
 Purpose (2)

Technical expertise
 Pricing / underwriting / claim management / data / financing
 Exclusions / Benefit types
 Risk rates loadings
 Staff training
 System and policy documentation
 Innovative products & unusual illnesses / occupations
 Quota share: usually used
 Initially low retention insurer, after gaining experience RI is reduced
 Purpose (3)

Financial Assistance
 Assists in following
 NBS
 M/A
 Improve free assets
 Quota share is the norm (other proportional RI may be used)
 Reinsurer commission paid to insurer

Tax, Solvency and Capital arbitrage

 Insurer and Reinsurer can reduce tax bills by complementing each other
 Reinsurer does not have to hold as much K for a given unit of risk as per regulations. E.g. savings of reinsurer
can be transferred to insurer in terms of higher reinsurer commission / cheaper RI premium rates.
 Loss types in HI

 Single event (outbreak of disease)

 Concentration of risk (territory)
 Concentration of risk (illness wise / cause wise)
 Large single loss (high SA, or a long claim payment period)
 RI contracts

Policy design
 Dates of commencement and termination of arrangement
 Type of treaty (surplus, quota, risk or original terms)
 Territories of sale
 Max and min ages at entry / expiry
 Max and min premiums / sum insured
 Admin requirements (frequency of submission, transmission of payments)
 Underwriting (degree of PH occupation class inclusion)
 RI contracts

Number Game
 Retention value and calculation
 Calculation of RI commission and Sum reinsured
 Profit sharing calculation
 Guaranteed and reviewable premiums (office or risk premium)
 RI software proprietary and sharing policies
 Details of financing RI
 RI contracts

Processes
 Claims management procedures
 Requirement of reinsurer inspection of insurer files

Agreements
 Service agreement (response timings)
 Arbitration agreement (in case of dispute)
 Legal jurisdiction of treaty
 Treaty terms for termination and facultative arrangements
 Risks of not reinsuring

 New product with no data (risk of mispricing)

 How to assign claim definition
 How to control accumulation of risk and Cat risks
 Underwriting procedure going wrong (selecting sub-standard lives)
 May not get reinsurer support when regulatory / tax regime change making RI a compelling option
 Poor sales / bad publicity
 Risks of reinsuring

 Reinsurer related:
 Expensive / Unsuitable
 Default risk
 Bad experience dealing with reinsurers e.g. dispute on claim recovery
 No / very little tax and regulatory K arbitrage using RI

 No requirement of reinsurer:
 In-house actuarial team for pricing & tech support for underwriting available
 Claim volatility is manageable (if volume is restricted)
 Free assets available
 Upside claim potential is limited (so RI risk transfer is inappropriate)

 Cheaper alternative: Setting up risk fluctuation reserve

 Considerations (1)

1. Insurer’s risk appetite

 Size of insurer and portfolio type (group vs. individual)
 Experience in market
 Available free assets & required level of stability of free asset ratio
 Competitiveness of premium rates

2. Reinsurer’s risk appetite

 Reinsurance capacity & expenses involved
 Management / Admin support
 Available free assets & credit rating
 Track record of supporting insurer in claim settlement / underwriting
 Whether it satisfies regulatory conditions if any put by regulator
 Considerations (2)

3. Arrangements
 Profit sharing arrangement in RI treaty
 Flexibility of arrangement
 Other existing RI

4. Others
 Valuation method: Gross or Net
 Regulatory & fiscal environment
 Average benefit level & expected distribution of benefit
 Impact of RI on reserving & K requirement
 Limits on the cover (excess levels)
 Tax and dividend implications
 RI alternatives

 Retain RI with same insurer

 Facultative instead of treaty for non standard RI
 Surplus instead of QS / use other type of non-proportional RI arrangements
 Require a deposit back / collateral

 Investigate alternative RI providers

 Cheaper RI and better recoveries (stronger RI)
 Different RI layers
 Reciprocal business (coinsure with other insurers)
 Industry pooling of risk
 RI alternatives

 Reduce RI
 Set up claim fluctuation reserve
 Increase retention limit
 Don’t reinsurance LOBs where claims recovered < Cost of RI
 Self insurance
 Set up a captive
 Pass risk to K markets (securitizations / cat market solution)
 Rely on state protection
 RI alternatives

 Product design changes

 Redesign / reprice whole range of products
 Limit high sums (to reduce RI)
 Change u/w and claim management approach (to reduce RI need)
Insurer monitoring reinsurer

 Reinsurer features
 Relationship with reinsurer (ease of working)
 Financial strength (accounts)
 Credit rating
 Business growth strategy (expansion in new area)
 Capacity to write new business
 Size of RI portfolio
 Diversification of RI and compare with other RI’s
 Estimate probability of RI default risk
 Future RI strategies in business cycle
 Identify any measures / indicators for early warning
 Relationship with regulator
Insurer monitoring reinsurer

 Balance sheet
 Estimate probability of recovery of RI claims
 Implications of default on insurer’s solvency level
 Extent of collateral arrangements
 Strategies implemented to mitigate counterparty risks
 Risk based K held by RI in respect of counterparty risk
 Changes in regulations
Insurer monitoring reinsurer

 Assistance
 IT and Financing assistance
 Evaluating TPA, tie up with distributors, control audits, regulatory filing
 Product innovation / development
 Value of tax / solvency arbitrage

 Capability
 Area of diversification – interest
 Capacity to accept business
 Admin requirements
 Quality and credibility of data
 K reserving requirements and ability to accept risk
Insurer monitoring reinsurer

 Premium & Claim

 RI premium vs. RI claim recovery – correspondence b/w EP & incurred claims
 Analyse RI outgo vs RI claim recovery – is it across all products & rating factors

 Payment method
 No overpayment of RI premium (refund from reinsurer in future)
 No underpayment – means reinsurer’s profit is more than current

 Checking
 Cross-check RI financials with reinsurer so that there is no data / reporting issues
 Check if there has there been any reduction in RI rates
 Some CS - some parts reinsurer is losing & in others gaining - overall gaining
 Insurer monitoring reinsurer

Cashflows
 Cost of more liquid assets
 Premiums calculated on consistent basis (earned, written, net) & claims as well
 Retention levels and Commission payback is correct
 Loadings are not too high
 PV of expected recoveries

Others
 Delays in reinsurer payment / claims declined by RI
 Data split by LOB, DCH, reinsurer, target market, underwriting method
Reinsurer monitoring insurer

 Claim frequency & severity monitored before offering rates to insurer

 Monitor trends & adjust risk rates

 Medical experience and Utilization trends

 Considering past experience of insurer

 Underwriting procedures, target market & Internal RM philosophy