Reinsurance Questions

-Is there a difference between Excess of Loss and Stop Loss Reinsurance?

-Why is individual surplus reinsurance useful for random fluctuations risk?

Thanks in advance.

 

Stop loss is a type of excess of loss reinsurance along with catastrophe reinsurance. To elaborate..

Stop loss involves the reinsurer paying the net loss over a retention limit (usually subject to a cap) which arises on a portfolio of contracts over a certain period.

Simple example would be having 10,000 term assurances with SA 1,000. The retention may be set at say 3000. If 10 claims are made then the insurer will receive 7000 from the reinsurer. If 3 (or less) claims are made then the insurer will receive nothing from the reinsurer.

Catastrophe reinsurance would have to involve a catastrophic event (as defined in the treaty). It works in a similar way to stop loss (in that the reinsurer will pay the net amount of any loss over the retention limit) but only if a catastrophic event occurs. A catastrophe could be something like several insured lives dying in the same incident.

Individual surplus can be used when there are a few large policies in a portfolio which result in concentration risk. Section 1.2 of chapter 26 gives a very simple example.

Individual surplus limits the amount of any one payout. It therefore takes the sting out of any particularly large claims. If you had 100 identical, independent policyholders, 99 of which had a SA of 100 and 1 of which had a SA of 100,000 the loss experienced if the single large policy makes a claim is much larger than that if a single small policy makes a claim.

If you had individual surplus reinsurance with a retention of 100 then the loss on the death of any policy holder would be 100 and the loss is no longer dependent on which PH randomly dies.


Open to any corrections, hope this helps.

 

I have a similar worry regarding reinsurance. How do you combine risk premium reinsurance with commission. I thought under risk premium reinsurance, it is the re-insurer that provides the rates to use. I am guessing that the commission would hence be insignificant unlike under the original terms where the cedant provides the rates and the re-insurer pays commission. I get disturbed anytime i come across this in the notes.

I cant get round this idea, can someone pls shed light.

 

Generally the purpose of comission is to reduce capital strain. Since risk premium includes a select shape, the effect of "natural" risk premiums has the same effect.

There's nothing to stop a reinsurer offering a commission structure but it wouldn't really be true risk premium; instead it would be a fixed shape loaded to produce the same end result.

 

Are you referring to example 3.1 in chapter 26? The 4th paragraph mentions combining the RPR with a financing commission arrangement to reduce NBS -
This is mentioned in the final paragraph of section 1.3 chapter 26.. You can negotiate with the reinsurer to provide initial commission on the RPR in exchange for them increasing the RPR rates to recoup this "loan".

I think this is what Calum is saying - just wanted to provide some reference to the notes for comfort.

 

Thanks guys, i am getting a hang on it now.