1. 6 principal functions of reinsurance
    • increase large line capacity: limit exposure per policy while offering more coverage
    • provide catastrophe protection: reduce potential losses from cat event
    • stabilize loss experience: lessen annual fluctuations to desired level (better capital mgt)
    • provide surplus relief: reduce net leverage ratio
    • facilitate withdrawal from a market segment: exit market quicker than with runoff
    • provide underwriting guidance: new market, uncomfortable with own expertise
  2. Increase large line capacity
    • scenario: company is unable to write larger contracts without reinsurance; buys surplus share pro rata reinsurance treaty; as a result writes 10% more on net, 40% more on gross 
    • surplus: little direct impact, other than earnings on new business
    • loss reserves: little changed if business model is stable; gross reserves impacted
    • UEP: little changed
    • leverage ratios: most of the impact is due to the scenario framework (more business)
    • income statement: total income increases because of more premium and inv. income
  3. Provide catastrophe protection
    • scenario: buy catastrophe treaty for 5% of gross premium paying for events XS of 10%
    • surplus: buying the treaty decreases surplus if not cat event, but substantially mitigates the risk of significant drop if large cat occurs
    • loss reserves: net reserves not impacted unless cat
    • UEP: little to no change
    • leverage ratios: if not cat, large impact from reduced surplus. If cat, stabilized
    • income statement: investment income reduced if purchase reinsurance, but underwriting income is substantially protected
  4. Stabilize loss experience
    • scenario: insurer wants to stabilize fluctuating results
    • surplus: lower, but with less fluctuations; expected impact is a reduction
    • loss reserves: gross reserves reflect volatility while net are stabilized 
    • UEP: reduced due to purchase of reinsurance
    • leverage ratios: more stable but slightly lower, investment income lower, UW inc. stable
  5. Provide surplus relief
    • scenario: buy 50% quota share to reduce net premium/reserve to surplus ratios
    • surplus: reduced by net underwriting cost of reinsurance
    • loss reserves: net reserves are a fixed percentage of gross reserves
    • UEP: net fixed % of gross
    • leverage ratios: significantly improved, although ceded reinsurance leverage increased
    • income statement: UW income cut in half, investment income significantly reduced
  6. Facilitate withdrawal from a market segment
    • scenario: management wants to exit a market, and is not willing to wait until runoff
    • surplus: expected surplus reduced due to reduction in assets, but no volatility
    • loss reserves: gross unchanged, net reserves disappear
    • UEP: gross unchanged, net disappear
    • leverage ratios: zero, only remaining risk is reinsurance collectibility
    • income statement: UW results zero
  7. Provide underwriting guidance
    • when insurer must enter new market and does not feel comfortable with its expertise
    • rely on reinsurer’s expertise in pricing and underwriting that market correctly
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