Page 36 - M97TB9_2018-19_[low-res]_F2F_Neat2

1/18 M97/February 2018 Reinsurance
1
Chapter

Key points

The main ideas covered by this chapter can be summarised as follows:
Purpose of reinsurance
• Provides protection against the consequences of unexpected material losses.
• Spreads risk by involving other insurers and reinsurers throughout a variety of different geographical areas.
• Increases capacity by permitting an insurer to accept more business than it is comfortable with at a gross level.
• Provides security by relieving the insurer of some of the uncertainty of loss.
• Increases stability in results by smoothing the net loss experience of the insurer from year to year.
• Increases confidence both on the part of investors in the insurer and customers of the insurer.
• Allows the insurer to manage the performance of its portfolio of risks and that of its asset base.
• Provides tax advantages since premiums ceded to reinsurers are tax deductible.
• Provides cash flow advantages since the insurer can make a cash call upon the reinsurer when losses occur.
• Influences corporate strategy as assists the insurer in deciding what proportion of its assets it is prepared to put at
risk from one, or a series of related losses.
Buyers of reinsurance
• Insurance companies are the principal customers of reinsurers.
• Lloyd’s syndicates are significant buyers who make demands of reinsurers to deliver sophisticated solutions to their
requirements.
• State insurance companies may, along with regional reinsurance corporations, receive compulsory cessions from
within their geographical or political community and require reinsurance to achieve balance in their portfolios and an
international spread of risk.
• Takaful companies accept insurances from Islamic communities and buy reinsurance from reTakaful companies or
conventional reinsurers if further capacity is needed.
• Captive insurance companies meet the needs of the ‘parent’ organisation. Reference copy for CII Face to Face Training
• Mutual insurance companies who are owned by their policyholders.
• Reinsurance companies themselves, along with reinsurance pools, buy reinsurance in order to dilute accumulations
of risk.
Motivation for selling reinsurance
• Reinsurance is sold in order to achieve underwriting profit and to generate premiums that can then be invested to
produce further income.
• In order to achieve reciprocity a company must be prepared to both buy and sell reinsurance.
Sellers of reinsurance
• Sellers of reinsurance tend to mirror the buyers already referred to and are summarised here as:
– reinsurance companies;
– Lloyd’s syndicates;
– insurance companies;
– State-owned reinsurance companies;
–reTakaful companies; and
– reinsurance pools.
Contractual relationship between buyers and sellers
• A reinsurance transaction is an agreement between a buyer and a seller.
• A contractual promise is made where, for its part, the buyer agrees to pay a premium and in return the reinsurer
agrees to make a payment if defined events or occurrences take place.