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2 Intro-Reinsurance.ppt
Introduction
(Re)Insurance Financial Strategies
¾ Pooling
Large number of small risks, where individual premiums inadequate
to cover individual losses
¾ Funding
Individual risks’ premiums set high enough to cover likely losses
(plus expenses and profit)
¾ Speculating
Large, unique exposure; low chance of loss; potential loss is very
high
Low enough likelihood that expected return greater than cost of
capital
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Introduction
(Re)Insurance Financial Strategies
4 Intro-Reinsurance.ppt
Reinsurance and Holborn’s Role
Agents
Reinsurance
Insurance Insurance Companies
Policyholders Companies Example:
Lloyd’s Of London,
Berkshire Hathaway
Brokers
Reinsurance Intermediaries
*Holborn*
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Types of Reinsurance - Summary
7 Intro-Reinsurance.ppt
Facultative Reinsurance
¾ Facultative reinsurance applies to an individual risk, i.e., one commercial fire
policy or even only one location. Insurer and reinsurer agree to the
reinsurance terms on each individual agreement. It is generally used to
reinsure:
a) extra-hazardous or unusual risks which might be excluded from treaty
reinsurance agreements.
b) high valued risks with policy limits exceeding maximum treaty parameters.
¾ For Property risks, specific information about construction, usage, contents,
fire protections and other safety attributes will be assessed by the
underwriter. For Casualty exposures, revenue, coverage type, and claims
history are key underwriting considerations.
¾ Both pro rata and excess of loss forms are used.
¾ Facultative premiums are usually based on the ceding company’s exposures,
not it’s premium. So, $25 per car, not 2% of Automobile premiums
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Treaty Reinsurance
¾ Certain risks are inevitably excluded to help define the exposure for the
treaty underwriter, who must rely on the capabilities of the ceding carrier
in determining the worth of any particular risk.
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Pro Rata (or Proportional) Reinsurance
¾ Insurer shares with the reinsurer all of the premiums and losses in a
certain percentage.
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Pro Rata Reinsurance
¾ Surplus Share: The insurer and reinsurer share a variable percentage of loss and
premium for each risk (not a fixed percentage, like a quota share).
¾ Example: $4Mn home, subject to a surplus share contract with a minimum retention of
$1Mn and maximum cession of $3Mn.
In this situation, the Reinsured can choose to cede anywhere from 0% to 75% of
the risk (being $3Mn. of $4Mn. value).
Given no maximum retention, the Reinsured can keep the entire risk net.
If the risk is deemed undesirable, the Reinsured can cede a maximum of $3Mn,
and retain $1 Mn. In this instance, 75% of the loss and premium is ceded to the
reinsurer.
¾ Other examples (same surplus share structure)
$2Mn. Home Up to 50% cessions (being $1Mn. of $2Mn.)
$1.5Mn. Home Up to 33% cession (being $500,000 of $1.5Mn.)
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Pro Rata Reinsurance
12 Intro-Reinsurance.ppt
Excess of Loss Reinsurance
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Excess of Loss Reinsurance
Per Risk
Retention and limit apply to each and every policy, individually
(usually subject to an occurrence limit).
Catastrophe (or Occurrence)
Retention and limit apply to one or many policies in the same event.
Aggregate (or “Stop Loss”)
Retention and limit apply to all losses from all covered policies, in
the aggregate, over a specified timeframe – usually no more than
one year.
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Excess of Loss Reinsurance
¾ Functions:
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Functions of Reinsurance
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Functions: i) Finance
¾ An insurance company’s growth may be limited because of unearned premium reserve
requirement(s). A company is forced to put all written premium into a UEP reserve account
while still paying business (acquisition) costs, (agents’ commissions must be paid on written
premium). The premium on an annual policy is earned at the rate of 1/12th per month.
Because acquisition costs must be paid immediately, there can be a substantial drain on
surplus, particularly when premium volume is expanding rapidly.
¾ Pro rata reinsurance enables a company to continue to write polices without draining capital
and surplus. It reduces written premium and increases the surplus, by means of a ceding
commission recouping pre-paid acquisition expenses.
17 Intro-Reinsurance.ppt
Functions: ii) Capacity
¾ The ability to offer significant capacity on any given risk allows an insurance
company to compete in the market. Most companies require greater capacity than
their own resources can provide. By reinsuring portions of risk, through pro rata
and/or excess of loss, a company can compete in the market.
¾ A company writing to a maximum policy limit of, say, $10,000,000 could double
that capacity by arranging a surplus share reinsurance treaty. Thus, a $20,000,000
policy can be written with 50% of $10,000,000 ceded to a surplus share
reinsurer(s).
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Functions: iii) Stabilization
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Functions: iv) Catastrophe
20 Intro-Reinsurance.ppt
Holborn’s Role as Reinsurance Intermediary
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Actuarial Support
Our Mission
To offer the best combination of proprietary,
commercially available and common-sense
tools for our clients to systematically evaluate
all of their choices for reinsurance purchasing
and risk management.
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Actuarial Support
¾ Founded in 1940’s
¾ Ahead of its time
¾ 7 employees (over 10% of our workforce)
¾ Customized models for each client
¾ Relationships with multiple vendors
¾ Proprietary original models to supplement weaknesses
in vendors’ models
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Actuarial Support
¾ Catastrophe modeling
Mapping includes
• Concentration studies / “Concentrics”
• Deterministic storms / “Look-a-likes”
Vendor-developed cat models, which we license
Holborn’s proprietary Inland Wind Cat model
¾ Dynamic Financial Analysis (DFA)
¾ Optimization / risk selection
¾ Reinsurance benchmark pricing
¾ BCAR “What-if’s”
¾ Risk transfer testing
¾ Rating agency questionnaires
24 Intro-Reinsurance.ppt