Slip System

Discussion in 'SP7' started by tatos, Jul 16, 2013.

  1. tatos

    tatos Member

    In chapter 6, they give a simple breakdown of the Lloyds slip system but I don't follow this very well, particularly:

    1. Why would a "firm order" ever be anything other than lower than all the quotes provided by the underwriters? I took the firm order as representing what the cedant was trying to bargain down with. So if the cedant offered a high firm order would it be just to ensure a greater chance that the risk is underwritten in future years?

    2. If the firm order was 75, say, and the lead underwriter's quote was 100, is the lead underwriter basically saying, "What percentage of the risk would I be comfortable with covering for 75"

    3. How does this underwriter choose the percentage he is willing to accept?

    4. Then what premium does he get for it?

    It would be great if this could be explained with a simple arbitrary numerical example. Perhaps with firm order of 75 and 3 underwriters whose quotes were 100, 100, 150?

    Many thanks!
     
    Last edited by a moderator: Jul 16, 2013
    tatos, Jul 16, 2013
    #1
  2. Ian Senator

    Ian Senator ActEd Tutor Staff Member

    The firm order is what the cedant has 'chosen' to be the price he's willing to pay. He then instructs the broker with this price to go and find cover. If the firm order is too low (as in your example), then I expect none of the underwriters will sign up for it (unless they change other terms and conditions, or just accept a lower - or even negative - profit) and the cedant will have to think again.

    Once the price is fixed, then each underwriter decides what proportion of the deal he wants to participate in. You might find the lead takes 100%. On the other hand, he may only take 50%, leaving the broker to find other reinsurers to take the other 50%. How much each underwriter is willing to take depends on many factors, eg underwriting guidelines and its own risk assessment.

    Hope this helps!
     
    Ian Senator, Jul 18, 2013
    #2
  3. tatos

    tatos Member

    Thanks Ian - that helps, and I've just discovered chapter 8 where I see that everything's explained a whole lot more :cool:
     
    tatos, Jul 18, 2013
    #3

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