“Our promise and bond is your security”

“Our promise and bond is your security”

“Treaty and facultative underwriting – a reinsurer’s perspective” Presented by: Tatenda Katoma “Our promise and bond is your security”

Agenda • Types of Reinsurance • Treaty – Main characteristics • Facultative – Main characteristics • Facultative – Practical application • Reinsurer’s interests • Cedant’s interests • Potential areas of conflict • General factors affecting reinsurers

Types of Reinsurance

Treaty – Main characteristics • Yearly agreement i.e. annually renewable contract • Automatic cover. • Bulky cessions i.e. no individual underwriting of risks by reinsurer. • Well defined underwriting standards and limits (to be followed by cedant) • Cedant submits treaty returns on a regular basis to the reinsurer(s)

Facultative – Main characteristics • Oldest method of reinsurance. • Each risk is offered individually (by the cedant) to the reinsurer. • All material facts about the risk are disclosed. • The reinsurer has an option of either accepting or declining.

Facultative – Practical application • to reinsure special risks which are outside the scope of treaties; • to reinsure amounts which are in excess of treaty limits; • to restrict the liabilities of the ceding company and that of reinsurers where the physical hazards of a risk are abnormally high; • reciprocity of business of similar quality; • to seek expertise and experience of reinsurers on risks of a special nature.

Reinsurer’s interests Bedrock principle of reinsurance “Reinsurers follow-the-fortunes (or follow-the-settlements) of Cedants.” Thus, reinsurers are interested in: • profitable underwriting (of the cedant); • in establishing lasting and mutually beneficial relationships with Cedants (as they avail technical expertise and training of Cedants’ staff);

Cedant’s interests Some of the genuine reasons why Cedants take out reinsurance are: • To spread and diversify risk; • To access additional underwriting capacity; • To smooth claims experience; • To tap on wide experience and technical expertise of the reinsurer.

Potential areas of conflict • Cedants may participate on certain accounts/risks for market positioning reasons – in turn, they may fail to be objective in underwriting the account. • There may be a misconception that a reinsurance programme is only valuable if there are reinsurance recoveries – resulting in anti-selection against reinsurer. • Non-disclosure of material facts about risk(s).

General factors affecting reinsurers • Capital levels and retentions • Changing regulatory landscape • Adverse selection and peak risk cession • Liquidity and cash problems • Claims inflation • Claims process • Underwriting challenges

Capital levels and retentions • Insurer demand for reinsurance slows as Capital Increases

Changing Regulatory Landscape • Upward review of minimum capital requirement i.e. stringent solvency requirement. • Reinsurance – an alternative source of cost-effective capital.

Adverse selection • Cedants no longer ceding portfolios • Reinsurers only exposed to peak risks without necessary pooling of risks and premiums.

Liquidity and cash problems • General cash shortages • Delay in premium remittance – which undermines investment returns for the reinsurer

Claims Inflation • Current cash shortages have led to an artificial claims inflation of 40%, which is being applied on the hard cash cost of goods. 40%

Claims process • Cedant expectations - timely payment • Reinsurer’s role - • technical guidance and payment (no re-underwriting during claim negotiation) • risk improvement areas for the future Problems faced : • lack of trust – cedant/broker overprotects client in order to retain business. • No cooperation and overstepping of mandate at claim negotiation.

Underwriting challenges • Underwriters should work as specialists for a particular line or lines of insurance. There is limited specialisation. • Despite the growing buzz on big data, there is still restricted use of data analytics in the industry’s underwriting process. • Data/statistics are not readily available – industry needs to improve IT administration systems. • A disconnect between pricing approach and (generous) policy wordings.

“Our promise and bond is your security”

THANK YOU Email: katomat@grandre.co.zw

“Our promise and bond is your security”