One of the reasons given in the core reading is that to: Allow aggregation of risks the cedant cannot manage on his own, so allowing manufacture of product lines. I do not quite understand what this means. Could someone please explain what this means or give an example of such. Also, what are these product lines?
Say you have a product line focusing on group life cover in a certain part of a country. Aggregation of risk could occur if the companies you are selling this to are all in one geographical location and suffer a large number of deaths due to a catastrophe such as a tsunami. Reinsurance can therefore be used to reduce this risk. You could therefore focus on developing this product line knowing that aggregation of risk has been passed on to the re insurer (albeit to a certain extent). Others, please correct me if I am wrong.
Though at the same time you should be sure your reinsurer can also handle both the risks it has taken from you and the risks it carries from other clients; given that a major cat will affect many lines of business across all clients, and that there are fewer reinsurers than direct insurers, this is not a small point. Though for the purpose of the exam it may be sufficient to write down "credit risk"...
