Reinsurance - Assignment X5 Solutions

[Alan2007]

I don't understand the underlined part of the paragraph as part of of the solution for Question X5.9 (ii) of Assignment X5. Can someone please explain?

The most important reason is that the terms of the treaty are likely to require it. The likely claims experience is heavily dependant on the level of underwriting in place, so this will have a material impact on the terms agreed


Thanks

 

[Meldemon]

Don't have the actual assignment to hand, but would hazard this should mean:

The heavier (more detailed) the underwriting, the less likely the insurance company will take on 'bad' risks (i.e. good underwriting (statistically) should mean that the company has fewer claims). Therefore the quality of the insurer's underwriting process will impact on the terms any reinsurer will sign up to as part of a treaty arrangement (or, the reinsurer is underwriting the insurance company on the grounds of the insurance company's own underwriting process).

Note that for as long as a treaty is in place the reinsurer has to take on the business specified in the treaty contract, so setting bounds in the actual treaty arrangement is how it would protect itself against bad risks taken on by the counterparty.

Hope this fits into the question & answer...

 

[Alan2007]

Reinsurance Treaty

The heavier (more detailed) the underwriting, the less likely the insurance company will take on 'bad' risks (i.e. good underwriting (statically) should mean that the company has fewer claims). Therefore the quality of the insurer's underwriting process will impact on the terms any reinsurer will sign up to as part of a treaty arrangement (or, the reinsurer is underwriting the insurance company on the grounds of the insurance company's own underwriting process).

Does this imply that if the the companys underwriting is more strict then the terms offered by a reinsurance treaty will be better (ie charge lower risk premiums and/or pay a higher reinsurance commission than for a company that underwrites less?

Many Thanks

 

[Meldemon]

Yes - if you turn the argument upside down - the worse an insurance company's underwriting process, the less 'attractive' its business will appear. Reinsurance companies will attempt to protect itself by either charging a higher premium, or having strict conditions in the treaty.

Potentially, if an insurance company cannot get good terms on a treaty arrangement, it may try to make its business appear more attractive by strengthening the underwriting processes. In the long run, the reinsurance premiums may then go down.

A good result would be to have a saving on reinsurance costs , improving profits, etc, all else being equal of course. Stronger underwriting = increased costs, so its all about the happy medium where a company can maximise profits and minimise costs...

Hope this helps!