Reinsurance-FC01.pptx

Reinsurance
By.
Winston Kuti-George MBA, FCII, FABE, SIRM, CMgr MCMI
Chartered Insurance Practitioner, UK
9/13/2022
Reinsurance-Insurance Foundation Certificate-West African
Insurance Institute
1

Learning Outcome
in this presentation, you will understand:
• Risk Transfer option: Individual & Company
• What is Reinsurance
• The Basic Principle and Purpose of Reinsurance
• Function of Reinsurance
• Sellers of Reinsurance
• Buyers of Reinsurance
• Types of Reinsurance:
• Facultative & Treaty
• Uses of Facultative Reinsurance
• Advantages of facultative reinsurance
• Treaty reinsurance
• Distinction between proportional & Bon-proportional
• Examples
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Risk
Avoid
Live in a
cave
Prevent
Sprinklers/ex
tinguisher
Limit
Solid
construction
Transfer
Insure
Accept
Put up with
a loss
Risk transfer options

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Risk
Avoid
Decline
Prevent
Add
warranties
Limit
Fix retention
and limit of
reinsurance
Transfer
Reinsure
Accept
Put up
with a loss
Insurers risk transfer options

What is Reinsurance?
Reinsurance is a transaction whereby one insurance company
(the “reinsurer”) agrees to indemnify another insurance company (the
“reinsured, “cedent” or “primary” company) all or part of the loss that
the latter sustains under a policy or policies that it has issued. For this
service, the ceding company pays the reinsurer a premium.
Source: Munich Re, Basic Guide
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Purpose of
Reinsurance
 Provides protection against the consequences of unexpected material losses.
 Spreads risk by permitting an insurer and reinsurers throughout a variety of
different geographical areas.
 Increase capacity by permitting an insurer to accept more business that it is
comfortable with at a gross level.
 Provides security by relieving the insurer of some of the uncertainty of loss.
 Increase stability in result by smoothing the net loss experience of the
insurer and customers of the insurer
 Allows the insurer to manage the performance of its portfolio of risks and
that of its asset base.
 Provide tax advantages since premium ceded to the reinsurers are tax
deductible.
 Provide cash flow advantages since the insurer can make a cash call upon the
reinsurer when losses occur.
 Influence corporate strategy as assists the insurer in deciding what
proportion of its assets it is prepared to put at risk from one, or a series of
related losses.

Function of Reinsurance
 Capacity Relief
This allows the cedant to write larger amount of insurance
 Catastrophe Protection
Protects the insurer against a large single, catastrophe loss or multiple of large
losses
 Stabilization
Help smooth the reinsured operating result form year to year.
 Surplus Relief
Releases the strain on the reinsured’s surplus in terms of rapid premium growth
 Market withdrawal
Provide a means of reinsured withdrawal from a line of business or geographical
zone or product line
 Expertise
Provides the reinsured with a source of underwriting information when
developing new product and/or entering new product line of insurance or a
new line of business or new market
The reasons common to all
for buying Reinsurance are:

Buyers of
Reinsurance
 Insurance Companies
Insurance companies are principal customers of reinsurers
 Lloyd’s Syndicates
Lloyd’s syndicates are significant buyers who make demands of
reinsurance to deliver sophisticated solution to their requirements.
 State-owned insurance corporations
state insurance companies may, along with regional reinsurance
corporations, received compulsory cession from within their
geographical or political community and require reinsurance to
achieve balance in their portfolios and an international spread of risk.
 Regional Insurance corporations
Companies established in the same way as state-owned insurance
corporations that are prevailing where individual states are united by
close political and cultural bonds.

Buyers of
Reinsurance
Takaful companies
takaful companies accept insurances from Islamic communities
and buy reinsurance from retakaful companies or conventional
reinsurers if further capacity is needed.
Captive Insurance Companies
A risk bearing entity controlled or owned by an organization
whose primary business is not that of insurance. The captive is
then in need of reinsurance for all the reasons that a primary
insurer would have.
Mutual Insurance Companies
They are companies owned by policy holder, who share in the
profits of the company by means of lower premiums or
preferential cover.
Reinsurance companies
Reinsurance companies themselves, along with reinsurance
pools, buy reinsurance in order to dilute accumulations of risk.

Sellers of
reinsurance
• Reinsurance companies
• Llyods syndicates
• Insurance companies
• State-owned reinsurance companies
• Retakaful companies; and
• Reinsurance pools

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Reinsurance
Facultative
Proportional
Quota share
Non-
Proportional
Excess of
Loss
Treaty
Proportional
Quota Share Surplus
Non-
proportional
Excess of
Loss
Stop loss
Cat Excess of
Loss
Types of Reinsurance

Facultative reinsurance
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Facultative means optional, so both
parties to the reinsurance of an
individual risk have a choice as to
whether to enter into the contract or
not: the original insurer in determining
whether it wishes to buy cover and the
reinsurer in determining whether it
wants to accept the risk and at what
terms.
Each risk is a separate reinsurance
contract, and this is important to note
when considering treaty reinsurance
later.

Uses of
facultative
reinsurance
Facultative reinsurance could be used in the following
ways:
o Where the insurer requires capacity beyond its
treaties providing automatic underwriting capacity.
o Where the risk is excluded from the insurer’s treaty
reinsurance.
o Where the insurer does not want to cede the risk to
its reinsurance treaty or where a particular risk,
although covered under the treaty reinsurer does
not wish to cover.
o Where the original risk is hazardous
o Where there are unique commercial, financial or
strategic reasons.

Advantages of facultative
reinsurance
Risk are considered individually.
Reinsurers can negotiate a
suitable premium for the actual
risk concerned rather than having
to consider it as part of an overall
portfolio of risk.
There is a freedom for the insurer
to offer any risk which may the be
accepted or declined by the
reinsurer.
The exposure of an insurer’s
treaty could be protected by
facultative reinsurance of
particular risks to ensure better
overall result and lower
reinsurance cost in the long term.
An insurer might benefit from the
specific knowledge of the
facultative reinsurer with regard
to the nature and potential of risk.
The opportunity for both parties
to develop a successful and
professional relationship.
A successful facultative
relationship with a reinsurer
might be a precursor to the
insurer offering it a place on its
schedule of treaty reinsurers.

Disadvantages
Delay in acceptance as risk are considered individually, the insurer cannot be certain of the placement of
the facultative reinsurance and this could affect its ability to underwrite the underlying risk.
The administration involved is labour intensive.
Delay in issuing a policy can cause problems with clients.
The insurer has to disclose full information regarding its underwriting of the risk. This could also lead to
problems if the insurer is also a competitor in that field.
The insurer may lose control over the handling of the risk.
There is the possibility of the reinsurer exercising a certain amount of influence over the insurer’s
underwriting by asking them to improve the risk offered or influence

Treaty reinsurance
• Obligations are imposed on the insurer to offer and the
reinsurer to accept business that falls within the treaty
agreement.
• It is used where blocks of businesses can be placed with a
reinsurer knowing that pre-agreed automatic cover is
available.
• Ceding and profit commission contribute to a lessening of
the cost of this type of reinsurance to the insurer.
• Treaties represent binding agreement that remove the
element of choice from both parties.
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Distinction between
proportional and non-
proportional method
• Facultative and treaty reinsurance can be arranged
on proportional and non-proportional bases.
• Proportional reinsurance implies that the insurer
cedes an agreed percentage, or proportion of the
risk and the reinsurer receives a corresponding
share of the premium(less commission) and pays
the same share of any loss.
• Non-proportional reinsurance only requires the
insurer to pay losses when they exceed a specified
monetary retention by the reinsured, and the
reinsurer’s premium is not proportional its potential
liability.

Examples
The ceding company has a 60% quota share treaty. Therefore,
40% of all premiums and losses will be retained by the
company and 60% of all premiums (less commission) and
losses will be ceded to the reinsurer subject to the limit of the
treaty. The commission to the ceding company is agreed upon
at 30%.
Premium
Assume a risk is written for a limit of $400,000 at a premium
of $2,000.
Premium retained by ceding company: 40% of $2,000 = $ 800
• Premium paid to reinsurer: 60% of $2,000 = $ 1,200
• Commission to ceding company: 30% of $1,200 = $ 360
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Losses
• Losses
Assume a total loss of $400,000 occurs. For this loss, the
ceding company would pay $160,000 (40% of $400,000)
and the reinsurer would pay $240,000 (60% of $400,000).
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Proportional & Non-Proportional
Reinsurance example
• Original risk: £60 Million which is shared equally between insurer A
and B with £30 million each. Insurer A has a surplus reinsurance treaty
of nine lines with a retention of £3 million, so its gross automatic
capacity is its retention of £3 million plus 9 lines of £3 million, in other
words (£3 million plus £27 million) £30 million.
• Insurer B has a facultative excess of loss reinsurance of £27 million
excess of £3 million. This means that the facultative reinsurance would
pay any loss incurred by insurer B that exceeds £3 million up to a total
of £27 million (i.e. giving B cover for any original loss it sustains up to
£30 million).
• When any loss to this original risk occurs, whether partial or total,
insurer A can expect to recover 90%, or 27/30 from its surplus
reinsurer. Conversely, insurer B’s facultative excess of loss reinsurance
will only allow a recovery of any claim where B’s share exceeds £3
million.
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Sum Retention 1st Surplus 2nd Surplus Facultative
1,800,000 100,000 1,000,000 500,000 200,000
4,500 (100,000÷1,800,00)*
4,500=250
(1,000,000÷1,800,00)
*4,500=2,500
(500,000÷1,800,000)
*4,500=1,250
200,00÷1,800,000*4,
500 =500
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Proportional & Non-Proportional
Reinsurance example
Consider the following losses:
• Loss 1: £2 million
Insurer A can recover 90% of its £2 million share, so £1,800,000
• Insurer B recovers nothing because its 3 million retention (or
deductible) is not exceeded.
• Loss 2: £5,500,000
• Insurer A can recover 90% of its £5,500,000 million share, so
£4,950,000
• Insurer B again recovers £2,500,000
• Loss 3: £8 million
• Insurer A can recover 90% of its £8 million share, so £7,200,000
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Surplus Treaty example
• Assume a 4 lines surplus treaty giving the insurer an
automatic underwriting capacity of £5 million (£1 million
own gross retention plus £4 million, comprising four surplus
lines each of £1 million).
• The insurer has accepted five risks, all of first-class
construction. If the insurer decided to retain its maximum
gross retention, then the risks would be apportioned to the
surplus treaty as follows:
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Surplus
Treaty
example
Reinsurance-Insurance Foundation Certificate-West African Insurance Institute
Risk Original sum
Insured
Company
retains
Cedes to
surplus
1 1,000,000 1,000,000 Nil
2 2,500,000 1,000,000 1,500,000
3 3,200,000 1,000,000 2,200,000
4 4,000,000 1,000,000 3,000,000
5 5,000,000 1,000,000 4,000,000

1st and 2nd Surplus Treaty example
• Assume a 4 lines surplus treaty giving the insurer an
automatic underwriting capacity of £5 million (£1 million
own gross retention plus £4 million, comprising four
surplus lines each of £1 million) plus a five-line second
surplus treaty, increasing the overall automatic
underwriting capacity to £10 million
• The insurer has accepted five risks, all of first-class
construction. If the insurer decided to retain its maximum
gross retention, and cede its maximum capacity to the first
surplus and any balance to the second surplus, the risk
would be apportioned as shown
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1st and 2nd
Surplus
Treaty
example
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Risk Original sum
insured
Company
retains
Cedes to
surplus
Cedes to
second
surplus
1 5,000,000 1,000,000 4,000,000 Nil
2 5,500,000 1,000,000 4,000,000 500,000
3 7,500,000 1,000,000 4,000,000 2,500,000
4 9,600,000 1,000,000 4,000,000 4,600,000
5 10,000,000 1,000,000 4,000,000 5,000,000

Reinsurance-FC01.pptx

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