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Chapter 1 Purpose of and the parties involved in reinsurance 1/7 Chapter

In proportional treaty reinsurance, it is customary for payments between a reinsured and its reinsurer to Refer to chapter 4 1
and chapter 5 for
be made after a quarterly or a half-yearly technical account has been rendered, detailing premiums due proportional and
and claims recoverable during the relevant period, with the balance of account being settled by the non-proportional
reinsurance
debtor. Treaties of this type usually contain a provision for the reinsured to receive rapid reimbursement
from the reinsurer when a substantial claim occurs in order to avoid an adverse effect on the reinsured’s
long-term investments. In non-proportional reinsurance, claims tend to be payable by the reinsurer upon
submission of the claim by the reinsured.
The technical funds of an insurer should be invested in such a way as to achieve the best rate of return,
bearing in mind the following points:
• the quality or security of the investment;
• the marketability of the investment;
• the currency and duration of the investment in order to match the technical liabilities; and
• the investment pattern, which should reflect the need to liquidise cash to satisfy short, medium and
long-term liabilities.
Notwithstanding the advantages investment can bring, it is especially important when interest rates are
at such a low level that the insurer strives to make a profit from its underwriting activities rather than
expecting investment income to turn a net loss into a net profit.

A9 Corporate strategy

The extent to which a company will risk its assets – if at all – will have been decided, but priorities have
to be established as to the amount of risk it is prepared to entertain and in which sectors of its portfolio.

New companies may find themselves risking more than they would choose, and would probably seek
New companies may
comfort from the arrangement of reinsurance. A new company may be caught between the need, on one find themselves
hand, to attract potential customers and find its place in the insurance markets at large in order to risking more than
they would choose
establish its business, and on the other hand, by the practical limitations on the extent of reinsurance
which can be arranged. This extent depends upon operating margins, or profit, which will be low (maybe
non-existent) in the early days. It is also subject to other limitations because of the need to comply with Reference copy for CII Face to Face Training
the demands of the regulatory authorities.
Be aware
In the UK, the PRA may state that only a proportion of the actual reinsurance arranged can be taken into account
when establishing the necessary level of reserves.

Similarly, an existing insurance company may wish to develop a new product; for example, a motor
insurer might want to expand into household business, or a non-insurance financial services company
might want to offer insurance products. As a case in point several retail firms have branched out into
selling financial services in the UK, either directly or in partnership with an existing insurance company.
In order to do this without affecting their overall results they may look for reinsurance to protect the new
venture.
Reinsurance would serve two main aims:

• It would cushion the impact of any adverse results that may occur in this new field, as a new insurer
might have to offer its product at a lower price or with a broader cover; and
• New insurers or those undertaking a new product may benefit from assistance offered by reinsurers in
product development, pricing and staff training, based on their previous experience of other
companies undertaking development in that area. The reinsurance company would look to build a
long-term relationship by providing this assistance and helping the ceding company to achieve better
results.
Some large multinational insurance companies create their own internal reinsurance vehicles for
subsidiary units to ensure that these units are not too adversely affected by large catastrophe losses in
their market. These internal arrangements retain part of the potential reinsurance premium within the
company.

Question 1.3
What is the inherent danger for a large multinational insurance company in adopting a strategy of creating their own
internal reinsurance vehicles?