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6/2 M97/February 2018 Reinsurance

Introduction

In order to understand the rationale for the design and construction of reinsurance programmes, we
need to consider the strategic and financial issues faced by the reinsurance purchaser: the insurance
company.
Essentially, the insurer wants protection in the form of one or more reinsurance contracts which meets
its objectives and incorporates cover, limits and retentions to safeguard its existence and prosperity.
This premise is a useful starting point to consider the design and construction of a reinsurance
programme – that is, a combination of reinsurance treaties – which meets the aforementioned strategic
objectives of the insurer together with the operational needs of individual classes of business.
Be aware
We referred to an insurer’s strategy and objectives in earlier chapters. Clearly an insurer must have a clear vision of
its strategic objectives if it wants to achieve them. A key objective for an insurer might be to make the best possible
return on capital invested by shareholders. Tactics and specific activities may have to be adjusted quickly to meet
changing circumstances if this goal is to be achieved, but this should be done with a clear sense of purpose. An
insurer’s reinsurance programme would be a central part of such a dynamic approach.

In this chapter, we look, in turn, at the design, the pricing and the placement of reinsurance
programmes.

Key terms

This chapter features explanations of the following terms and concepts:
Adequate capacity Automatic reinsurance Catastrophe model Collateral
cover
Contract certainty Experience rating Exposure rating Frequency and severity
rating
6 Grading reinsurers Increased limit factor (ILF) Insolvency Loading
Chapter Market Reform Material information Reciprocity Risk premium Reference copy for CII Face to Face Training

Contract (MRC)
Security

A Designing programmes

The main considerations to be taken into account in the design and formulation of a reinsurance
Number of
considerations to be programme are:
taken into account
• the primary objectives of the company when considering the reinsurance placement, which could
include:
– shareholder profit (in which case the company may well be aiming to minimise the reinsurance
premium outlay),
– ensuring that its overall portfolio is not unbalanced by single large losses,
– developing new business (which could lead to seeking more reinsurance protection), and
– protecting against large fluctuations in the underwriting result, thus reducing the amount of capital
required and protecting capital;
• appropriate forms of reinsurance contract, i.e. treaty, facultative, proportional, non-proportional;
• availability of sufficient information to enable realistic decisions to be made over the cover and
retention levels required;
• availability of reinsurance capacity and the use of brokers;
• availability of reciprocity, if appropriate; and
• alternatives to conventional reinsurance products.