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Reinsurance . Nigel Davies December 2, 2008. Reinsurance. Session 1 Introduction & Overview. Case Study, Round 1. Session 2 Case Study Feedback. Life Reinsurance. Finite Reinsurance. Failure of Reinsurance. Session 3 Catastrophe Insurance. Securitization. Case study – Round 2.

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reinsurance

Reinsurance

Nigel Davies

December 2, 2008.

reinsurance1
Reinsurance

Session 1

Introduction & Overview. Case Study, Round 1.

Session 2

Case Study Feedback. Life Reinsurance. Finite Reinsurance. Failure of Reinsurance.

Session 3

Catastrophe Insurance. Securitization. Case study – Round 2.

Session 4

Case Study Feedback. Supervisory Issues.

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Reinsurance

Session 1

Introduction & Overview.

  • Reinsurance Market
  • Definitions and Types of Contract
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Reinsurance

Reinsurance

Company

Retrocession

Reinsurance

Company

Reinsurance

Broker, Direct.

Insurance

Company

Broker, Direct.

Direct Insurance

Broker, Agent, Phone,

Online, In person.

Insured

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Reinsurance

…and why do we measure it by premium?

How much of this is reinsurance?

Reinsurance

Company

Global Premiums in 2007

Reinsurance

Insurance

Company

Broker, Direct.

Source: Swiss Re, Sigma 3/2008.

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Reinsurance

Destination & Source of Reinsurance Premium (US$ million)

Source: IAIS Global Reinsurance Market Report, December 2007

Data Source:- 59 Reinsurers: Bermuda 8; Europe 21; Japan 2; USA 28.

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Reinsurance

Reinsurance Premiums Assumed by Class of Business & Contract Type (US$ million)

Proportional Reinsurance

Ceding insurer and assuming reinsurer share an agreed portion or percentage of original premiums and subsequent losses in respect of the reinsured business.

Non-proportional Reinsurance

Reinsurer assumes the part of the ceding insurer’s claims that exceed a certain amount. The premium is a specially calculated amount.

Source: IAIS Global Reinsurance Market Report, December 2007

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Reinsurance

Gross Premium

Net Premium

Retention Ratio

Life

2003

4166

4080

98%

2004

4668

4589

98%

2005

4097

3993

97%

Non-life

Motor

2003

440

374

85%

2004

496

421

85%

2005

588

524

89%

Property

2003

557

54

10%

2004

501

50

10%

2005

520

62

12%

Other

2003

382

268

70%

2004

391

241

62%

2005

613

417

68%

Reinsurance Profile – Trinidad & Tobago (TT$million)

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Reinsurance

Non-Life

Life

Reinsurance Market Dynamics – How do reinsurers make money?

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Reinsurance

Non-Life

High returns in low cat. years attracts capital.

New capital creates overcapacity and reduces prices (market softens).

Cats wipe out capital and prices increase (market hardens).

Hard market attracts capital.

Life

Information asymmetry. Reinsurers have annually updated loss experience – better than (time-lagged) mortality tables.

Risk profile: pandemics vs. advances in medical science.

Life vs. Pensions products hedge mortality and longevity risks.

Primary market trend for savings products reduces need for life reinsurance.

Reinsurance Market Dynamics – How do reinsurers make money?

HIGHLY CYCLICAL

INCREASING LONGEVITY

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Reinsurance

Capital Movements in a Major Reinsurers – 2007

(Overall 7% increase)

Source: Global Reinsurance Market Review 2007. Benfield. www.benfieldgroup.com

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Reinsurance

Non-life Reinsurance Prices

For expected loss of 4%, premium was 11% of sum insured in 2008 (2007, 13%).

For expected loss of 1%, premium was 4% of sum insured in 2008 (2007, 5.5%).

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Reinsurance

Increasing Longevity in the Caribbean

For 18 age-group cohorts.

Source: Caribbean Epidemiology Centre. October 2000. www.carec.org

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Reinsurance

Story so far……….

  • Reinsurance activity, measured by premium, is substantial but impossible to make cross-sectoral comparisons
  • Reinsurance risk tends to migrate to large European reinsurers.
  • Non-life RI >> Life RI.
  • Proportional & non-proportional reinsurance
  • Non-life RI highly cyclical – 7% increase in capital in 2007 led to price drops of 10%-20% in ROL for 2008.
  • Life primary market driven by increasing longevity…..
  • ….. growing due to savings products, but this has little effect of Life RI. Life RI based on information asymmetry.
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Reinsurance
  • Prioritize Non-life reinsurance over Life reinsurance.
  • Cover Proportional & Non-proportional contracts equally.
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Reinsurance

Classification of Reinsurance Contracts

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Reinsurance

Reinsurance Contracts

TREATY REINSURANCE

FACULTATIVE REINSURANCE

}

Reinsures bundles of primary policies

Reinsures individual primary policies

Non-life / Life.

Proportional / Non-proportional.

Obligatory / non-obligatory.

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Reinsurance

Reinsurance Contracts

TREATY REINSURANCE

FACULTATIVE REINSURANCE

}

Reinsures bundles of primary policies

Reinsures individual primary policies

Non-life / Life.

Proportional / Non-proportional.

Obligatory / non-obligatory.

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Reinsurance

Non-life Treaty Reinsurance

Non-proportional

Proportional

Excess of Loss

Stop Loss

Quota Share

Surplus Treaty

Excess of Loss and Quota Share Treaties are most common.

Stop Loss contracts are very rare nowadays

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Reinsurance

1. Excess of Loss Contracts - Basics

RI cover exhausted!

Claim: For a $5m claim, $3m is recoverable under this contract.

$5m

$4m

Limit

$3m

$3m xs $1m

Reinsurance cover for specified line(s) of business

$2m

}

$1m

Attachment point

Deductible / Risk retention

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Reinsurance

1. Excess of Loss Contracts

$50m

3rd Layer, $20m xs $30m

No reinstatements

$40m

$30m

2nd Layer, $10m xs $20m

1 reinstatement

2nd Layer, $20m xs $10m

1 reinstatement

$20m

1st Layer, $10m xs $10m

1 reinstatement

$10m

1st Layer, $5m xs $5m

3 reinstatements

$5m

Line of Business A

Line of Business B

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Reinsurance

1. Excess of Loss Contracts

$50m

$40m

$30m

}*

*

$20m

$10m

$5m

1

2

3

Line of Business A

Line of Business B

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Reinsurance

2. Stop Loss Contracts

Limit (e.g. loss ratio of 130%)

Stop loss covers a specified %age of losses between attachment point and limit.

Aggregate Losses / Claims of Insurer

Attachment point (e.g. loss ratio of 110%)

Aggregate Premiums

  • Attachment points and limits expressed as either:
  • Loss ratios, or
  • Absolute amounts
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Reinsurance

3. Quota Share Contracts

Proportional Reinsurance

Ceding insurer and assuming reinsurer share an agreed portion or percentage of original premiums and subsequent losses in respect of the reinsured business.

  • Quota Share Contracts have 2 types of limits:
  • Per risk limit
  • Aggregate exposure limit
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Reinsurance

3. Quota Share Contracts

Aggregate exposure limit

Reinsurer imposes a limit on aggregate exposure (total sums insured). A breach of this limit will mean an averaging down of the QS cover.

$6m

$5m

}

$4m

$3m

$4m per risk limit

$2m

75% Quota Share

$1m

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Reinsurance

3. Quota Share Contracts

Aggregate exposure limit

Reinsurer imposes a limit on aggregate exposure (total sums insured). A breach of this limit will mean an averaging down of the QS cover.

Profit Commission

With extensive reinsurance cover in the lower layers, insurers may allow underwriting standards to drop (in order to gain market share) & this reduces underwriting profit.

To counteract this, QS contracts typically allow a retroactive payment from the reinsurer of, say, 20% of its profit on the contract.

$6m

$5m

}

$4m

$3m

$4m per risk limit

$2m

75% Quota Share

$1m

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Reinsurance

4. Surplus Treaty Contracts

Surplus Treaty

Ceding insurer retains a specified amount – calledthe line.

The amount ceded to the reinsurer is defined as aspecified number of lines.

Example: 4 line surplus treaty of $1m

$6m

$5m

$4m

Reinsurance cover for 4 x retention in a 4 line surplus treaty. NOTE – 100% COVER FOR THESE CEDED LINES.

$3m

$2m

$1m

Retention

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Reinsurance

4. Surplus Treaty Contracts

Example: 4 line surplus treaty of $1m

$6m

$5m

1

Cedant retains all premiums and claims.

$4m

$3m

2

Cedant retains 25% of premiums and claims. Reinsurer assumes 75% of premiums and claims.

2

premium

$2m

$1m

1

premium

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Reinsurance

What type of reinsurance contract suits the loss scenarios in these lines of business?

Household Fire & Contents (Non-catastrophe)

Property Catastrophe

Amount

Workers’ Compensation

Motor

Time

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Reinsurance

Motor

Property Catastrophe

Household Fire & Contents (Non-catastrophe)

Amount

Workers’ Compensation

Time

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Reinsurance

The Ideal Reinsurance Program?

Motor

Catastrophe XL.

2 reinstatements to cover 3 events in total.

Property Catastrophe

Household Fire & Contents (Non-catastrophe)

Casualty XL.

3 reinstatements on bottom layer to cover 4 events.

Workers’ Compensation

Quota Share.

To cover attritional losses in all lines of business.

Amount

Claims Arranged by Line of Business

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Reinsurance

CASE STUDY – ROUND 1.

  • Contract wordings are “standardized” throughout the industry.
  • Terms & conditions can vary greatly.
  • Wordings do vary in quality and are capable of misinterpretation.
  • Wordings contain jargon……..
  • Please read the handout which is about a
  • Non-life Casualty XL Program.
  • Prepare questions for discussion & reasons for your questions
  • Prepare suggestions on how this program can be improved upon.