Q1. pg 7 "Under a ‘net level premium arrangement’, the reinsurer spreads the risk premiums so that they are level over the term of the contract. This method has the advantage that the insurer, if desired, can simply load the reinsurance charges to obtain the premium payable by the policyholder " Please explain this para Q2. pg 12 section 1.3 it is mentioned that excess of loss is used where amount of claim is unknown. Also, it talks about excess of loss on occurence basis where aggregate loss from an occurance exceeds pre-determined retention My ques is in aggregate indeed claim amount is unknown but in individual policy case this will be known then why material talks about it that in individual policy it will be unknown ? Q3. pg 13 why excess of loss with multiple retention limit is mainly found for group life policies ? Q4. how financial reinsurance works ? explain in simple words Can we say under this reinsurance reinsurer liability = max (0, avg. insurer profit - actual insurer profit ) ? Why this is considered as loan ? Q5. pg 17 explain difference between contingent loan and non contingent loan in simple words. also why repayment will be here under contingent loan ?
Hi Sagar Q1. If the reinsurer charges a level amount of 10 for 100,000 of cover, then the insurer can charge the policyholder a level amount of 10 for 100,000 of cover. Q2. Yes, it's only the aggregate form of excess of loss where the amount is unknown. Q4. There's many ways that financial reinsurance can be structured, but the way referred to in the notes is effectively a loan. The reinsurer gives the insurer money at the start (the loan) and the insurer repays the loan over time if it makes a profit on the cohort of business. I don't think I understand what your formula is trying to do. Q5. Sorry, I'm not sure what you're asking here. Best wishes Mark
Q1. I didn't get your response to my first question Q3. could you please provide your response to this question Q5. This topic of contingent/non contingent loan is a part of financial reinsurance topic as per material
Hi Sagar Q1. The advantage of a level reinsurance premium is it fits perfectly with the level premiums we charge the policyholder. So we can use the reinsurers rates to directly set the policyholder premium. Q3. One reason for this might be the possibility of a catastrophe within the group leading to very large aggregate claims. Q5. By non-contingent loan, do you mean the risk premium approach? Under the risk premium approach the loan is paid by charging higher reinsurance premiums, under the contingent loan the loan is repaid out of future profits. Sorry, I don't know what you are asking when you say "also why repayment will be here under contingent loan"? Best wishes Mark
Q1. you mentioned that policyholder can be quoted premiums same as what level premiums have been quoted to us by the reinsurer. as per my understanding re-insurer quotes the premium rate when cedent tries to reinsure that business which it has already written. please help me in understanding how the re-insurer will quote the premium rate to direct insurer in advance which direct insurer will further quote it to policyholder
Hi Sagar The insurer can set up a reinsurance treaty in advance of selling the policies. This would be far more common than setting up the treaty after selling the policies. The big advantage being that the insurer knows the costs so that it can incorporate into its pricing. Best wishes Mark
Hi Mark, Apologies if this seems pedantic (just want to be sure I'm understanding the difference between net level and increasing vs g'teed and not g'teed). Quotes from the above thread: "Q1. The advantage of a level reinsurance premium is it fits perfectly with the level premiums we charge the policyholder. So we can use the reinsurers rates to directly set the policyholder premium." "The big advantage being that the insurer knows the costs so that it can incorporate into its pricing." Please could I clarify something? In the above thread, the way we're talking about net level premiums being used, it seems that the advantage comes more from the fact that the premiums are g'teed rather than the fact that they're level (ie, increasing risk premiums that are also g'teed would be (almost) equally as useful in being able to determine a premium to charge the PH - the insurer would just need to do a bit of rearranging to transform them into a level stream to charge the PH)? Thanks, Matt
Hi Matt I agree that the premiums being guaranteed also helps here. But increasing premiums wouldn't be so helpful even if they were guaranteed. There would be a mismatch between the timing of the policyholder premiums and the timing of the reinsurance premiums. This would expose the insurer to reinvestment risk. Best wishes Mark
Thanks very much Mark. So your point is that the premium received by the insurer would initially be higher than the risk premium that the insurer pays the reinsurer, at that same time, but vice versa would be true later on in the term. So the insurer will have to invest these excesses (ie where retail premium > risk premium) at the start of the term to be able to fund the deficits (ie where retail premium < risk premium) later on in the term -> hence the (re)investment risk? Also, a related question. When we say the insurer can use the reinsurance premiums to set its premium, specifically how is this being achieved. Are we necessarily assuming that the insurer reinsurers 100%? Or are we saying that if, say, the reinsurer is going to charge us 10 for 100,000 of cover then we’re inferring that that’s the correct amount to charge the customer (ie the reinsurance quote provides valuable information) regardless of whether we reinsurer or not (ie if the reinsurer is happy to charge 10, then we should be happy to charge 10, without reinsurance). And so, whether we fully/partially/don’t reinsure is kind of inconsequential (because that will just determine who gets what proportion of the 10), and instead the significant part is that once we know that 10 covers the risk, then we know that we just need to worry about expenses and profit?
Hi Matt We mean the second of your paragraphs. So the insurer reinsures part of its business and finds out the risk premium from the reinsurer is 10 for 100,000 and just loads that in assuming that it is right. The insurer doesn't need to reinsure it all. Best wishes Mark
