Blanchard - Basic Reinsurance Accounting

Question 1

Identify some of the functions of reinsurance. (1-3)

Answer 1

CATASTROPHE protection - a very large loss will be mostly absorbed by reinsurance
STABILIZE loss experience - reinsurance cuts the right tail off the loss distribution
WITHDRAWAL from market is facilitated - off-loading risk to reinsurance is quicker than runoff

Question 2

Identify some of the functions of reinsurance. (4-6)

Answer 2

INCREASE large-line capacity - but minimize associated risk
GUIDANCE from reinsurer - with expertise in U/W & pricing for that particular line
SURPLUS relief - reinsurance reduces net leverage ratio

Question 3

What is a ‘ commutation agreement’ (in the context of reinsurance)?

Answer 3

An AGREEMENT between ceding insurer and the reinsurer that PROVIDES for the valuation, payment and complete discharge of ALL OBLIGATIONS between the parties under a particular reinsurance contract.
- the reinsurer gives the ceded claims BACK to the original insurer

Question 4

Advantages of (or reasons for) commutation - from the reinsurer’s point-of-view. (4)

Answer 4

• increases STABILITY for long-tailed lines
• decreases claims expenses
• decreases U/W leverage
• to exit the market quickly

Question 5

Advantages of (or reasons for) commutation - from the primary insurer’s point-of-view. (5)

Answer 5

• remove reinsurance CREDIT risk
• insurer receives benefit of favourable LOSS development
• decreases EXPENSE costs
• more EFFICIENT claims handling
• receives immediate Cash Flow

Question 6

Disadvantages of commutation - from the primary insurer point-of-view. (2)

Answer 6

• risk of adverse development on claims

- capital required goes up (to support increased liabilities)