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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

INTODUCTION TO REINSURANCE

NOLAN ASCH

CAS RATEMAKING SEMINAR

INT-7

insurance

INSURANCE

The insurer insures the individual or the corporation

reinsurance

REINSURANCE

The REINSURER insures the insurance company

insurance vs reinsurance
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
reinsurance1
REINSURANCE
  • Buyers assumed to be knowledgeable
  • Responds to actual loss
  • Provides indemnification only
  • Reimburses for payments already made
  • Usually Global
capacity
CAPACITY
  • Single Risk (FAC WTC)
  • PORTFOLIO (TREATY)
capacity mechanisms
CAPACITY MECHANISMS
  • Excess-of-Loss
  • Quota Share
slide10

FUNCTIONS OF REINSURANCE

  • CAPACITY
  • CATASTROPHE
catastrophe
CATASTROPHE
  • QUOTA SHARE
  • EXCESS OF LOSS
  • SECURITIZATION
slide12

FUNCTIONS OF REINSURANCE

  • CAPACITY
  • CATASTROPHE
  • STABILIZATION
stabilization

STABILIZATION

Reduction in Variance (swings)

stabilization1

STABILIZATION

Extreme contractual case

“STOP-LOSS”

Aggregate Excess

slide15

FUNCTIONS OF REINSURANCE

  • CAPACITY
  • CATASTROPHE
  • STABILIZATION
  • FINANCING
financing reducing liabilities

FINANCINGReducing Liabilities

Ceding Commissions

“Overrides”

financing

FINANCING

May increase PHS due to transaction

financing1

FINANCING

Finite Reinsurance......

but ALL Reinsurance is Financial

slide19

FUNCTIONS OF REINSURANCE

  • CAPACITY
  • CATASTROPHE
  • STABILIZATION
  • FINANCING
  • ENTER AND EXIT MARKETS
enter or exit markets

ENTER OR EXIT MARKETS

Lessens risk as you learn

With 100% Q/S you exit

slide21

FUNCTIONS OF REINSURANCE

  • CAPACITY
  • CATASTROPHE
  • STABILIZATION
  • FINANCING
  • ENTER AND EXIT MARKETS
  • UTILIZE REINSURER EXPERTISE
using reinsurer expertise

USING REINSURER EXPERTISE

Large or unusual claims

Large or unusual risks

Special relationships and/or knowledge

limitations of reinsurance
LIMITATIONS OF REINSURANCE
  • Will NOT make bad business profitable
  • Transaction Costs
  • Rating Agency Impacts (Gross/Net)
19 75 mill xs 0 25 mill

$19.75 Mill xs $0.25 Mill

(sounds like a wide layer)

typical layering
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
high frequency low severity

High Frequency/ Low Severity

Buffer layers

ie 250 xs 250

low frequency high severity

LOW FREQUENCYHIGH SEVERITY

Capacity Layers

ie 10m xs 10m

client broker negotiation

CLIENT/BROKERNEGOTIATION

Change or resubdivide

the layering

layer trap
at “last minute”

Ask for 150 xs 100

--Requires more data

LAYER TRAP
pricing traps
PRICING TRAPS
  • AGGREGATE ANNUAL DEDUCTIBLES
assume a 10 rate
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
slide44

GIGO

Garbage-In

Garbage-out

slide46

NINO

Nothing-in

Nothing-out

experience rating

EXPERIENCE RATING

Using losses of the risk

to price the risk.

standard

STANDARD

All losses at half the

attachment point & up

actuarial approach

ACTUARIAL APPROACH

DETRENDED LOSSES

Varies with age of claim

BEGINS to show ACTUAL

CLAIMS as a sample outcome

exposure rating attempt to rate reinsurance based upon the true underlying exposures

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)

limits profile 100 000 policy limit
LIMITS PROFILE$100,000 Policy Limit
  • Yr 1990 10% of exposures at $100,000
  • Yr 1991 25% of exposures at $100,000
  • Yr 1997 90% of exposures at $100,000
  • loss was atypical in 1990
  • layer is effective 7/1/97

Include the loss??

limit loss

LIMIT LOSS

limit loss to 1990 policy limits

or

trend and develop loss

we don t do this anymore

“WE DON’T DO THIS ANYMORE”

“Throw out “ claims from

MGA’s, classes or states

we no longer write

quota share issues
QUOTA SHARE ISSUES
  • Moral hazard/ Retention 1% net
  • Ceding Commission
  • Overrides
  • Sliding Scales
  • Loss Corridors