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Chapter 6 Reinsurance programmes 6/27

Key points

The main ideas covered by this chapter can be summarised as follows:
Designing programmes
• When considering the reinsurance placement, the insurer sets out to achieve automatic cover, adequate capacity,
sufficient scope, economic advantage, and security and continuity.
• The type of treaty chosen will depend on:
– the composition of the business to be reinsured;
– exposure to accumulations of losses arising from one occurrence;
– the extent that unlimited liability is covered by the original policies;
– whether fluctuating profits and losses is a feature of the classes of business covered;
– the extent to which the ceding insurer requires growth or capacity; and
– the amount of premium that the ceding insurer wishes to cede.
• Other relevant considerations include:
– whether the insurer wants part of the reinsurance premium rebated in the form of commission;
– whether the insurer wants a contribution towards each claim;
– the class of business mix;
– whether speed of claims settlement is important; and
– whether reinstatements of cover are required.
• The capacity of a treaty should be adequate for the majority of the risks offered and accepted.
• Separate treaties are taken out for individual classes of business except in the case of liability business where
classes are often combined.
• The insurer considers the historical development of its account in order to assess the type of reinsurance
programme that provides the best cover and if it is obtainable at an acceptable price.
• The programme may comprise proportional and/or non-proportional treaty reinsurance:
– proportional reinsurance can be used to reduce the gross exposure; and
– non-proportional reinsurance can be used to reduce the net exposure. Reference copy for CII Face to Face Training Chapter
• Facultative reinsurance is commonly used for the risks or parts of risks not protected by the treaty(ies). 6
Pricing programmes
• Price is derived from the following factors:
– risk premium, which is the cost of claims including a loading for fluctuations;
– external costs, which include acquisition expenses and agents’ commission;
– internal costs, such as administration and staff costs; and
– desired profit or return.
• There are three main approaches to reinsurance pricing:
– experience rating uses experience (losses and exposure) to estimate average future loss costs;
– exposure rating uses reinsurance exposures together with general industry data about loss ratios and severity
patterns as a basis for estimating your expected losses; and
– frequency and severity rating involves developing a stochastic (simulated hypothetical) model to simulate loss
experience.
• Catastrophe models identify and quantify the likelihood of the occurrence of specific natural disasters in a region
and estimate the extent of incurred losses. They comprise four basis components (or modules):
– the hazard module defines the hazards, that is, a set of stochastic events;
– the inventory module defines the portfolio of properties at risk;
– the vulnerability module quantifies the expected damage to the portfolio caused by the hazards (together, the
probabilistic risk analysis); and
– loss (of financial) component translates the physical damage into total monetary loss.
• Having established the model price, the risk is underwritten to establish a technical price (or premium) and
reinsurers may wish to load the risk premium for any number of factors including:
– any change in the nature of the insurer’s portfolio;
– any change in its underwriting philosophy;
– rating changes designed to grow market share;
– the possibility of abnormal fluctuations in loss experience; and
– service requirement costs if the insurer wants to buy the reinsurer’s technical assistance.