An introduction to reinsurance

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An introduction to reinsurance
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The history of insurance and reinsurance

• Striving for security, making provisions
• The origins of insurance
• Economic expansion favored development
• The first insurance companies

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The history of insurance and reinsurance

• From the individual risk to the portfolio
• Professional reinsures
• The insurance industry reaches maturity
• The basis of modern insurance the law of large
  numbers

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An introduction to reinsurance
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A definition of reinsurance

• Reinsurance is insurance for insurance companies
• Why is there a need for reinsurance?
  
  
• to limit (as much as possible)
  annual fluctuations in the losses he must bear
  on his own account.
• to be protected in case of catastrophe.

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A definition of reinsurance
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The nature and function of reinsurance

• The basic function of reinsurance
• Individual risks and portfolios
• Balanced portfolios
• Unbalanced portfolios

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How reinsurance affects the direct insurer

• Reduces the probability of the direct insurers
  ruin by assuming the catastrophe risks.
• Stabilises the direct insurers balance sheet by
  taking on a part of the risk of random
  fluctuation, risk of change, and risk of error.
• Improves the balance of the direct insurers
  portfolio by covering large sums insured and
  highly exposed risks.

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How reinsurance affects the direct insurer

• To enlarges the direct insurers underwriting
  capacity by accepting a proportional share of the
  risks and by providing part of the necessary
  reserves.
• To increases the amount of capital effectively
  available to the direct insurer by freeing equity
  that was tied up to cover risks.
• To enhances the effectiveness of the direct
  insurers operations by providing many kinds of
  services

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How reinsurance benefits the direct insurer

• Through facultative reinsurance
• Through non-proportional treaty reinsurance
• Through proportional treaty reinsurance
• Through financial reinsurance

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Who are the largest reinsurers?
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Basic forms of reinsurance facultative and
obligatory

• Facultative reinsurance
• Is reinsurance for individual risks.
• Obligatory reinsurance
• Is treaty reinsurance for entire
  portfoliosautomatic reinsurance.

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Proportional reinsurance

• Quota share reinsurance

Reinsurer assumes an agreed-upon, fixed quota
(percentage) of all the insurance policies
written by a direct insurer within the particular
branch or branches defined in the treaty. This
quota determines how liability, premiums and
losses are distributed between the direct insurer
and the reinsurer.
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Quota share reinsurance
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Quota share reinsurance
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Proportional reinsurance

• Surplus reinsurance

The direct insurer himself retains all risks up
to a certain amount of liability (his retention).
This retention may be defined differently for
each type (class) of risk. The reinsurer will
accept the surplus the amount that exceeds the
direct insurers retention. This limit is usually
defined as a certain multiple of the direct
insurers retention, known as lines (see example
below).
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Example 1
Example 1 The cedents original liability16 from
his share in a given risk amounts to 3 million
the premium is 1.50 (of the sum insured) and
the loss is 1.5 million. The risk is shared by
the cedent and the reinsurer as follows
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Example 2
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Example 3
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Surplus reinsurance
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Non-proportional reinsurance

• Excess of loss reinsurance
• Excess of loss ratio reinsurance
• Stop loss reinsurance

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Non-proportional reinsurance excess of loss (XL)
reinsurance

• Deductible, cover limit
• - No matter what the sum insured, the direct
  insurer carries for his own account all losses
  incurred in the line of business named in the
  treaty up to a certain limit known as the
• deductible.
• WXL/R and CatXL covers
• - Excess of loss insurance can be broadly
  divided into covers per risk (WXL/R) and covers
  per catastrophic event (CatXL).

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Non-proportional rating methods

• Experience rating
• - This method is based on past loss events.
  Suitably adjusted, past loss statistics can give
  a good picture of the loss burden to be expected
  in the future.
• Exposure rating
• - If no adequate loss statistics are
  available, the reinsurer will attempt to find a
  similar portfolio with sufficient loss experience.

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Loss event 1
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Loss event 2
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Loss event 3
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(No Transcript)
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Direct insurers and Reinsurers a comparison
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Direct insurers and Reinsurers a comparison
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The underwriting cycle

• Freedom of contract
• Capacity and premiums
• Contributory factors
• Managing the cycle

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Q A