-
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
-
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
-
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
-
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
-
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
-
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
-
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
|
|