Page 48 - W01TB8_2017-18_[low-res]_F2F_Neat

2/10 W01/March 2017 Award in General Insurance

The websites work with a number of direct insurers and intermediaries to deliver a service to the
customer where the completion of one question set provides quotations from a number of insurance
providers. The customer can then select a company that offers their insurance product at a
2 competitive rate.
Chapter The emergence of these websites as a customer-focused price comparison mechanism has changed the
landscape of the insurance market.
However, they are not without their critics. The imperative to save time and effort in submitting personal
details by limiting the number of questions, the critics point out, may affect the accuracy of quotations.
They add that the results can be confusing as they are not always a true reflection of what it will really
cost with the insurer, once fuller details are submitted.

Price comparison websites can, and do, cut across traditional boundaries: direct insurers, for example,
by definition deal directly with the public. However, the prices of many direct companies may be
accessed through this route.

H Reinsurance

You will remember from chapter 1 that just as individuals, corporations and public bodies may feel the
need to transfer risk, so too do insurers. They achieve this by using the services of reinsurers that
specialise in accepting business originally underwritten by insurers. Reinsurance may be on an
individual risk basis, an event basis or on a portfolio (wide range) of risks.

H1 Purpose of reinsurance

We could start by asking ‘Why reinsure at all?’ Each insurer could decide to insure only those risks that
they were able to accept within their own defined limits. However, if we consider this for a moment we
can see problems:
• What about several losses to different insured risks that are all connected in some way, e.g. storm
damage to many insured properties at once? Reference copy for CII Face to Face Training
• What about very large losses, e.g. a massive explosion or terrorist attack?
• What about the cumbersome nature of risk sharing if it is all is done by means of each insurer taking a
small direct share or even sharing by means of co-insurance?
An insurer is able to reinsure a risk that it holds because it stands to lose financially as a result of a
claim. Although in theory the whole of an individual risk could be reinsured, this would make no sense,
so insurers reinsure only part of a risk that they hold. In this way reinsurance may be used to share
losses on a risk-by-risk basis. One of the big differences between co-insurance and reinsurance is the
fact that when an insurer places part of a risk with a reinsurer, the policyholder will not normally know
that this has happened. It follows therefore that there is no contractual relationship between the original
policyholder and the reinsurer. If a claim occurs the policyholder will look to the insurer to meet the loss
in full; any subsequent recovery of reinsurance monies is entirely a matter for the insurer to pursue.

In summary, reinsurance exists to:
• smooth peaks and troughs in the claims experience;
• protect the portfolio (really the balance sheet);
• provide improved customer service; and
• provide support for insurers entering new areas of business.

Let us look at these now in greater detail.
Question 2.1

Against what type of catastrophe perils might an insurer wish to reinsure?