Reinsurance
By Roar Rasten Gard AS
The Nordic Association of Marine Insurers
1
Why a session on Reinsurance?
•
•
•
All marine insurers are heavily reliant on reinsurance in
their operations
Both underwriting and claims handling are effected by
the company’s reinsurance program and philosophy
Insurance is the art of spreading risks and reinsurance is
an important part of this
Goals for this session
•
Discover why companies use reinsurance
◦ Underwriting capacity
◦ Earnings volatility
◦ Capital protection
•
Understand different types of reinsurance
◦ Facultative reinsurance
◦ Treaty reinsurance; proportional and non-proportional
◦ Pool
•
Reinsurance in practice, understand the impact of
reinsurance
◦ Quota Share
◦ Excess of loss with and without aggregate
Definition of risk
Risk is the potential for loss or failure to meet
business objectives as a consequence of
internal or external events
Risk Capacity
The ability to carry risks
•
Demands:
◦ Regulatory requirements
◦ Market requirements (i.e. Rating)
◦ Capital providers requirements
◦ Other?
•
Instruments:
◦ Capital
◦ Portfolio mixture
◦ Reinsurance
◦ Other?
Risk appetite
Risk appetite reflects the amount of risk taking
that is acceptable to an organisation
An organisations risk appetite will shape its
attitude towards risk taking and define level of
exposure to specific risks or risk groups that the
organisation is able to tolerate
Important factors for deciding the company’s
risk appetite?
Reinsurance
•
“Insurance of insurance companies”
◦ “Reinsurance is the transfer of parts of the
hazards or a risk that a direct insurer assumes
by way of insurance contracts or legal provision
on behalf of an insured, to a second insurance
carrier, the reinsurer, who has no contractual
relationship with the insured.”
(M. Grossmann)
In distinction to co-insurance where the contractual
relationship is between the insured and its co-insurers
Why reinsurance?
•
Increase in underwriting capacity (maximum limit to be offered
as risk transfer to a policyholder)
•
Reduction in portfolio volatility (better balanced portfolio)
•
Reduction in the economic effect of a catastrophe
(accumulation of risks)
•
Removal of unwanted risks
Reduced capital need
A reinsurer balance their book of business by taking on the same
types of risk from many insurers.
Distribution of insurance risks
Policy holders
Insurance compromises
Reinsurers
Portfolio Exposure
Exposure
Peak exposures
Max acceptable loss for own account
No of cover
Basic: Reinsurance Forms
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Facultative reinsurance:
◦ Facultative reinsurance is reinsurance for individual risks
•
Obligatory Reinsurance
◦ Obligatory reinsurance is treaty reinsurance for portfolios
•
“Claims Pool”
◦ A pool is not reinsurance but sharing of claims costs among
a group of insurers
Source: Swiss Re
Basic: Reinsurance Types
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Proportional reinsurance
•
Non-proportional Reinsurance
•
Alternative risk transfer (ART)
The reinsurer’s share of premium is directly proportional
to his obligation to pay claims*
The reinsurer obliges himself to pay all losses above the
deductable/excess amount up to a contractually defined cover
limit*
Often organised as an instrument to smooth result over time
*Source: Swiss Re
Reinsurance instruments
•
Proportional reinsurance:
◦ Facultative proportional reinsurance
◦ Quota Share treaty reinsurance
◦ Surplus treaty reinsurance
•
Non-proportional reinsurance:
◦ Facultative non-proportional reinsurance
◦ Excess of Loss treaty reinsurance
◦ Stop Loss
Facultative proportional Reinsurance
per risk reinsurance
30%
80%
100%
70%
20%
Buy out
of top
exposure
“Fronting”
of
Captive
Buy out
of unwanted
risks
Three examples where facultative proportional reinsurance is used
The proportion is used both when sharing premium and claims
The insurance conditions are often discussed with lead reinsurer before
the policy are written
Quota Share
Premium
Reinsured
share
Own account
Claims
50%
50%
50%
50%
Quota Share
•
•
•
Treaty capacity 50 million (exposure per risk; sum
insured or PML)
Placed share 50% (every risk is ceded 50%)
Overrider commission 10% (negotiable)
Quota Share Reinsurance
Premium written
Incurred claims
Brokerage
Own expenses/overrider comm.10%*
Technical result
Gross
figures
100.0
75.0
10.0
8.0
7.0
50 %
Figures
QS reins. for own
share
account
50.0
50.0
37.5 37.5
5.0 5.0
5.0 3.0
2.5
4.5
* Negotiable
As long as the exposure of a risk is less than or equal to the treaty capacity the risk
shall be ceded to the treaty and both premiums and claims are shared in the agreed
proportions.
Quota Share and Fac
•
•
If single risks have and exposure greater than the QS
capacity the risks have to be reduced to the max limit
before entered to the treaty.
Proportional fac. is often used for this purpose
Quota Share Reinsurance
Premium written
Incurred claims
Commissions
Own expenses/overrider comm.*
Technical result
Gross
Ceded
figures
Fac.
110.0 10.0
82.5
7.5
11.0
1.0
8.8
7.7 1.5
Figures
after Fac.
100.0
75.0
10.0
8.8
6.2
50 %
Figures
QS reins. for own
share
account
50.0
50.0
37.5 37.5
5.0 5.0
5.0 3.8
2.5
3.7
* Negotiable
It is not seldom that facultative reinsurers are not paying overrider commission
Exercise 1 QS
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Program: 50% quota share with treaty capacity 50 million
•
Brokerage Nil
•
Overrider commission 10%
•
Portfolio:
1. Exposure 50 million, premium 300.000
What will be the net* ceded premium to reinsurers?
The risk has a claim of 1 million , what is the claim recovery
from reinsurers?
* Premium net of commissions
Exercise 1 QS
A 50% Quota share
With a treaty capasity 50 million
Overrider 10%
Premium
Gross
300,000
Ceded Premium
Overrider
Net ceded
Gross
Ceded claim
-
Claim
1,000,000
Exercise 2 QS
•
Program: 80% quota share with treaty capacity 50 million
•
Brokerage Nil
•
Overrider commission 10%
•
Portfolio of 5 risks:
1. Exposure 75 million, premium 750.000
2. Exposure 50 million, premium 300.000
3. Exposure 30 million, premium 200.000
4. Exposure 2 million, premium 20.000
5. Exposure 50.000, Premium
1.000
Do we need to use Fac to reduce the exposure to the treaty?
What will be the net ceded premium to reinsurers?
Risk 2 has a claim of 1 million and risk 4 has a claim of 50.000.
What is the total claims recovery from reinsurers?
Exercise 2 QS
Exercise 2
80 % Quota Share with capasity 50 mill
Brokerage nil, overrider commission
10 %
Ceded premium
Risk
Sum
Gross
Treaty
Share ceded Share
Exposure
premium limit
to Fac
to treaty
1 75,000,000
750,000 50,000,000
2 50,000,000
300,000 50,000,000
3 30,000,000
200,000 50,000,000
4 2,000,000
20,000 50,000,000
5
50,000
1,000 50,000,000
1,271,000
Premium
to QS
-
Recovery from reinsurers
Risk
Sum
Gross
Exposure
Claims
1 75,000,000
2 50,000,000
3 30,000,000
4 2,000,000
5
50,000
-
Treaty
Share
limit
to treaty
50,000,000
50,000,000
50,000,000
50,000,000
50,000,000
Claims
to QS
-
Reinsurers
80% share
-
Reinsurers
Less
Net ceded
share of prem. overrider premium
-
-
-
Surplus treaty
•
Each risk is ceded with an individual share
◦ Max retention for each risk is a fixed amount
◦ Ceded share is the share of the risk exceeding max
retention
 Example:
 A risk with exposure (PML) 100
 Insurance company’s max retention 25
 Ceded share to reinsurers (100-25)/100 = 75%
•
•
•
Treaty capacity is often expressed in number of lines
where one line in the company’s max retention
Brokerage is ceded and claims recovered in the same
per cent as premium
Overrider is to be agreed
The Nordic Association of Marine Insurers
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Surplus treaty
Each risk is ceded with an individual share
Exposure
140
120
Fac. reinsurance
100
25%
14%
10%
80
Reinsurance
2 lines = 60
50%
57%
60% 67%
60
62%
57%
40%
40
Own retention
1 lines = 30
20
0
25%
29%
30%
33% 38%
43%
25%
60% 75% 100%
Facultative non-proportional reinsurance
Excess of Loss (XL) per risk reinsurance
Exposure
100
Reinsured
50
Deductable
Expressed as:
Cover is 50 in excess of 50 (deductable)
The treaty covers claims in excess of deductable.
For this the cedent pays an agreed premium.
Excess of loss treaty. Cover all claims in an agreed
portfolio for a limit in excess of underlying
120
100
80
60
Reinsured
40
20
Own retention
0
This treaty is expressed as a treaty 80 excess of (xs) 20
Excess of Loss premium
•
Premiums are agreed and are not directly linked to
portfolio premium
◦ Often expressed as a RoL, meaning premium divided by
cover limit multiplied by 100. If you pay 300 for a limit of
1.000 the rate is 30 on line.
◦ Premiums are usually adjustable to portfolio premium. The
premiums are agreed on a bases of an Estimated Premium
Income (EPI). If the premium income increases in excess of
EPI, the treaty premium increases with the same
percentage.
◦ A minimum and deposit premium is often agreed
Excess of Loss Reinstatement premium
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When buying a XL-treaty you buy the right to draw on the
reinsurers for claims in excess of underlying up to a full agreed
limit.
◦ The treaty 80 xs 20 gives you the right to collect 80 from the reinsurers if the
claim is 100 or more, or you can collect 20 from each of 5 claims which are 40,
then the cover is exhausted.
•
Usually it is agreed that after a claim you reinstate the cover by
paying an additional premium (reinstatement premium). This
can be expressed as:
◦ 2 reinstatement at 100, meaning that you have the right and the obligation to
reinstate the cover two times by paying an additional premium equal to the
original agreed premium for each reinstatement. The reinstatement premiums
shall also be adjusted. There are also treaties with the wording: free and
unlimited reinstatement meaning that no additional premium is charged and
there are no restrictions to how many times you can use the limit.
Layered XL - program
120
100
80
3rd layer
50 xs 50
2nd layer
30 xs 20
1st layer
10 xs 10
60
40
20
0
Retention
Layered XL - program
160
140
120
4th layer
50 xs 100 with 1 reinstatement at 100
3rd layer
50 xs 50 with 2 reinstatement at 100
2nd layer
30 xs 20 with 2 reinstatement at 100
1st layer
10 xs 10 XS 30 in the aggregate* with
2 reinstatement at 100
100
80
60
40
20
0
Retention
*In the aggregate; you can not collect from reinsurers before claims to layer
exceeds the agreed aggregated amount
Exercise 3a XL-program
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2 layered program:
◦
◦
◦
•
1st layer 10 xs 10 with 2 reinstatement at 100. Rate on line (RoL)
is 25.
2nd layer 30 xs 20 with 2 reinstatements at 100. RoL is 15.
Minimum and deposit premium is equal to estimated premium
What is estimated premium for layer 1 and 2?
Premium cost per layer
Layer
limit
1
2
Sum
RoL
M&D Prem.
-
Exercise 3b XL-program
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2 layered program:
◦
◦
◦
◦
1st layer 10 xs 10 with 2 reinstatement at 100. Rate on line (RoL)
is 25.
2nd layer 30 xs 20 with 2 reinstatements at 100. RoL is 15.
Total premium written is 66 million at the end of the year
There are no claims to the program
The program is adjustable at an Estimated Premium Income
(EPI) of 60.
•
What is the total adjusted premium for layer 1 and 2?
Premium cost per layer
Layer
limit
1
2
Sum
RoL
Adjustment Adjusted
M&D Prem.
rate
premium
-
-
Exercise 4 XL-program
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2 layered program:
◦
◦
◦
1st layer 10 xs 10 with 2 reinstatement at 100. Rate on line (RoL)
is 25.
2nd layer 30 xs 20 with 2 reinstatements at 100. RoL is 15.
Minimum and deposit premium is equal to estimated premium
The program is adjustable at an EPI of 60.
•
•
What is estimated premium for layer 1 and 2?
There are 3 large claims in the year: one is 30, the 2nd
one is 12 and the third is 15. Calculate the claim recovery
from each layer.
Claims recovery per layer
Retention
Claim 1
Claim 2
Claim 3
Sum
-
Layer 1
10 xs 10
-
Layer 2
30 xs 20
-
Total
30.0
12.0
15.0
57.0
Exercise 5 XL-program
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2 layered program:
◦
◦
◦
•
•
•
1st layer 10 xs 10 with 2 reinstatement at 100. Rate on line (RoL)
is 25.
2nd layer 30 xs 20 with 2 reinstatements at 100. RoL is 15.
Minimum and deposit premium is equal to estimated premium
The program is adjustable at an EPI of 60.
What is estimated premium for layer 1 and 2?
There are 3 large claims in the year: one is 30, the 2nd
one is 12 and the third is 15. Calculate the claim recovery
from each layer.
What will be the reinstatement costs and the net
recoveries from reinsurers?
Reinstatement premium per layer
ReinstateLayer
ment
Claim 1
Retention
Layer 1
2 at 100%
Layer 2
2 at 100%
Total
-
Reinstatement payable
Claim 2
Claim 3
-
-
Total
-
Net recovery
-
Exercise 6 XL-program
•
2 layered program:
◦
◦
•
•
•
•
1st layer 10 xs 10 with 2 reinstatement at 100. Rate on line (RoL)
is 25.
2nd layer 30 xs 20 with 2 reinstatements at 100. RoL is 15.
The program is adjustable at an EPI of 60. Minimum and
deposit premium is equal to estimated premium.
What is estimated premium for layer 1 and 2?
There are 3 large claims in the year: one is 30, the 2nd one is
12 and the third is 15. Calculate the claim recovery from each
layer.
What will be the reinstatement costs?
The total premium income for the portfolio under the
program has reached 66. Recalculate the premium for the
program and the reinstatement premium (adjusted
premium).
Exercise 6 XL-program
Adjustment premium
Actual
EPI
premium
Layer
M&D Prem.
1
2
Sum
-
Adj. rate
Reinst. Prem. Pre adj. Prem
-
The Nordic Association of Marine Insurers
Adj. Rate
Adj. Prem
-
Tot. Prem
-
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Combination of Quota Share and Excess of Loss
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•
•
A Quota Share treaty will often leave the insurer with a
possibility for unacceptably large losses.
It is therefore common to protect the portfolio for own
account after the Quota Share treaty by an Excess of
Loss program.
Example: A 50% Quota Share with capacity 100 where
own retention is protected by an excess of loss program
40 xs 10.
Reinsurance security
•
Ability and willingness to pay claims
◦ Rating
◦ Market approach (long term player or? History?)
◦ Long tail business?
◦ Ability to pay (Risk of default)
◦ Willingness to pay
The right reinsurance panel is important
Have we achieved?
•
Discovering why companies use reinsurance
◦ Underwriting capacity
◦ Earnings volatility
◦ Capital protection
•
Understanding different types of reinsurance
◦ Facultative reinsurance
◦ Treaty reinsurance; proportional and non-proportional
◦ Pool
•
Reinsurance in practice, understanding the impact of
reinsurance
◦ Quota Share
◦ Excess of loss with and without aggregate
The Nordic Association
of Marine Insurers
39