2, a. Insurer X insures a large number of small property accounts with average p

Question

2,

a. Insurer X insures a large number of small property accounts with average premiums of $1,000. The policies range from a low of $600 to a high of $1,400 premium. Insurer X wants to grow but is inhibited by statutory surplus requirements. As the re-insurer, what kind of treaty reinsurance program would you recommend for insurer X and why.

b. Insurer Y has decided to expand its personal lines auto and home insurance program from the middle west to the southern states, including the gulf coast states. Insurer Y has good experience with wind claims because of toreadors in the middle west. While it expects similar tornado losses in many of the southern states, it is more concerned with hurricanes. As Insurer Y’s re-insurer what kind of treaty reinsurance program would you recommend for auto and home insurance and why.

Explanation / Answer

1- reaty Reinsurance means that the ceding company and the reinsurer negotiate and execute a reinsurance contract under which the reinsurer covers the specified share of all the insurance policies issued by the ceding company which come within the scope of that contract. The reinsurance contract may oblige the reinsurer to accept reinsurance of all contracts within the scope (known as "obligatory" reinsurance), or it may allow the insurer to choose which risks it wants to cede, with the reinsurer obliged to accept such risks (known as "facultative-obligatory" or "fac oblig" reinsurance).

There are two main types of treaty reinsurance, proportional and non-proportional. Under proportional reinsurance, the reinsurer's share of the risk is defined for each separate policy, while under non-proportional reinsurance the reinsurer's liability is based on the aggregate claims incurred by the ceding office

Under proportional reinsurance, one or more reinsurers take a stated percentage share of each policy that an insurer issues ("writes"). The reinsurer will then receive that stated percentage of the premiums and will pay the stated percentage of claims. In addition, the reinsurer will allow a "ceding commission" to the insurer to cover the costs incurred by the insurer (mainly acquisition and administration).

The ceding company may seek a quota share arrangement for several reasons. First, it may not have sufficient capital to prudently retain all of the business that it can sell.

The ceding company may seek surplus reinsurance to limit the losses it might incur from a small number of large claims as a result of random fluctuations in experience

Under non-proportional reinsurance the reinsurer only pays out if the total claims suffered by the insurer in a given period exceed a stated amount, which is called the "retention" or "priority". For instance the insurer may be prepared to accept a total loss up to $1 million, and purchases a layer of reinsurance of $4 million in excess of this $1 million. If a loss of $3 million were then to occur, the insurer would bear $1 million of the loss and would recover $2 million from its reinsurer. In this example, the insured also retains any excess of loss over $5 million unless it has purchased a further excess layer of reinsurance.

The main forms of non-proportional reinsurance are excess of loss and stop loss.

Excess of loss reinsurance can have three forms - "Per Risk XL" (Working XL), "Per Occurrence or Per Event XL" (Catastrophe or Cat XL), and "Aggregate XL". In per risk, the cedant's insurance policy limits are greater than the reinsurance retention.

In catastrophe excess of loss, the cedant's retention is usually a multiple of the underlying policy limits, and the reinsurance contract usually contains a two risk warranty

Aggregate XL affords a frequency protection to the reinsured. For instance if the company retains $1 million net any one vessel, $5 million annual aggregate limit in excess of $5m annual aggregate deductible, the cover would equate to 5 total losses (or more partial losses) in excess of 5 total losses

I would suggest non-proportional reinsurance under treaty Insurance

2- Under 2nd condition i would prefer non proportional catastrophe reinsurance under treaty insurance because the cedant's retention is usually a multiple of the underlying policy limits, and the reinsurance contract usually contains a two risk warranty (i.e. they are designed to protect the cedant against catastrophic events that involve more than one policy, usually very many policies).

For example, an insurance company issues homeowners' policies with limits of up to $500,000 and then buys catastrophe reinsurance of $22,000,000 in excess of $3,000,000. In that case, the insurance company would only recover from reinsurers in the event of multiple policy losses in one event (e.g., hurricane, earthquake, flood).

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