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 Reinsurance
…and why
do we
How much measure it
of this is by
reinsurance premium?
?

Reinsuranc
Global Premiums in e
2007 US$ Growth Growth e Company
billion in 2007 in 2006 a nc
u r
Life 2,393 5.4% 4.1% i ns
Re

Non-life 1,668 0.7% 3.9%

Insurance Broker, Direct.
Total 4,061 Company

Source: Swiss Re, Sigma 3/2008.

 Reinsurance
Destination & Source of Reinsurance Premium (US$
million)
Gross
Reinsurance Risk Net “Risk”
Premium “Located” In:
Assumed
Europe 88,989 (64,653) 24,336

North America 81,946 (90,306) (8,360)

Asia & Australasia 1,989 (11,219) (9230)

Africa, Near & Middle (2,614) (2,614)

East
Latin America (4,132) (4,132)

Total 172,924 (172,924) NIL

Source: IAIS Global Reinsurance Market Report, December 2007

Data Source:- 59 Reinsurers: Bermuda 8; Europe 21; Japan 2; USA 28.
 Reinsurance
Reinsurance Premiums Assumed by
Class of Business & Contract Type
(US$ million)
Proportional Reinsurance
Ceding insurer and
assuming reinsurer share
an agreed portion or
percentage of original
premiums and subsequent
losses in respect of the
reinsured business.
Non-proportional
Reinsurance
Reinsurer assumes the
part of the ceding insurer’s
claims that exceed a
certain amount. The
premium is a specially
calculated amount.

Source: IAIS Global Reinsurance Market Report, December

2007
 Reinsurance
Reinsurance Profile – Trinidad & Tobago
(TT$million)
Gross Premium Net Premium Retention
Ratio
Life
2003 4166 4080 98%
2004 4668 4589 98%
2005 4097 3993 97%
Non-life
Motor 2003 440 374 85%
2004 496 421 85%
2005 588 524 89%
Property 2003 557 54 10%
2004 501 50 10%
2005 520 62 12%
Other 2003 382 268 70%
2004 391 241 62%
2005 613 417 68%
 Reinsurance
Reinsurance Market Dynamics – How do reinsurers make
money?

Non-Life Life
 Reinsurance
Reinsurance Market Dynamics – How do reinsurers make
money?
Non-Life Life
1. High returns in low cat. 1. Information asymmetry.
years attracts capital. Reinsurers have
2. New capital creates annually updated loss
overcapacity and experience – better than
reduces prices (market (time-lagged) mortality
softens). tables.
3. Cats wipe out capital 2. Risk profile: pandemics
and prices increase vs. advances in medical
(market hardens). science.
4. Hard market attracts 3. Life vs. Pensions
capital. products hedge
mortality and longevity
risks.
4. Primary market trend
HIGHLY CYCLICAL
for INCREASING
savings products
LONGEVITY
reduces need for life
 Reinsurance
Capital Movements in a Major Reinsurers –
2007
(Overall 7% increase)

Source: Global Reinsurance Market Review 2007. Benfield.

www.benfieldgroup.com
 Reinsurance
Non-life Reinsurance Prices

For expected loss of 4%, premium was

11% of sum insured in 2008 (2007,
13%).
For expected loss of 1%, premium was
4% of sum insured in 2008 (2007,
5.5%).
 Reinsurance
Increasing Longevity in the
Caribbean
For 18 age-group cohorts.

Source: Caribbean Epidemiology Centre. October 2000. www.carec.org

 Reinsurance
Story so far……….
1. Reinsurance activity, measured by premium, is
substantial but impossible to make cross-
sectoral comparisons
2. Reinsurance risk tends to migrate to large
European reinsurers.
3. Non-life RI >> Life RI.
4. Proportional & non-proportional reinsurance
5. Non-life RI highly cyclical – 7% increase in
capital in 2007 led to price drops of 10%-20% in
ROL for 2008.
6. Life primary market driven by increasing
longevity…..
7. ….. growing due to savings products, but this
has little effect of Life RI. Life RI based on
information asymmetry.
 Reinsurance

• Prioritize Non-life reinsurance over

Life reinsurance.

• Cover Proportional & Non-

proportional contracts equally.
 Reinsurance

Classification of Reinsurance
Contracts
 Reinsurance
Reinsurance
Contracts

TREATY FACULTATIVE
REINSURANCE REINSURANCE
Reinsures Reinsures
bundles of individual
primary primary
policies policies
}
Non-life / Life.
Proportional / Non- Obligatory / non-
proportional. obligatory.
 Reinsurance
Reinsurance
Contracts

TREATY FACULTATIVE
REINSURANCE REINSURANCE
Reinsures Reinsures
bundles of individual
primary primary
policies policies
}
Non-life / Life.
Proportional / Non- Obligatory / non-
proportional. obligatory.
 Reinsurance

Non-life Treaty Reinsurance

Non-proportional Proportional
Excess of Loss Quota Share
Stop Loss Surplus Treaty

Excess of Loss and Quota Share Treaties are most

common.
Stop Loss contracts are very rare nowadays
 Reinsurance
1. Excess of Loss Contracts -
Basics
RI cover
exhausted!

$5m Claim: For a $5m claim, $3m is

recoverable under this contract.

$4m Limit

$3m
$3m
xs Reinsurance cover for
$2m $1m specified line(s) of
business
$1m Attachment point

} Deductible / Risk retention

 Reinsurance

1. Excess of Loss Contracts

$50m

3rd Layer, $20m xs

$40m $30m
No reinstatements

$30m
2nd Layer, $10m xs
$20m 2nd Layer, $20m xs
$20m 1 reinstatement $10m
1st Layer, $10m xs 1 reinstatement
$10m
$10m 1 reinstatement
1st Layer, $5m xs $5m
$5m 3 reinstatements

Line of Business A Line of Business B

 Reinsurance

1. Excess of Loss Contracts

Claims & RI Recoveries ($m)
$50m
Claim 1 Claim 2 Claim 3 Loss
Scenari
$40m o
Gross Claim 55 25 30 110
$30m
}* R/I Rec. Layer 1 (10) (10) NIL (20)

$20m *
R/I Rec. Layer 2 (10) (5) (5) (20)

R/I Rec. Layer 3 (20) N/A N/A (20)

$10m
$5m 1 2 3
Net Claim 15 10 25 50

Line of Business A Line of Business B

 Reinsurance

2. Stop Loss Contracts

Limit (e.g. loss ratio of 130%)
Aggregate Losses / Claims of Insurer

Stop loss covers a

specified %age of losses
between attachment point
and limit.
Aggregate Premiums

Attachment point (e.g. loss ratio of

110%)

Attachment points and limits

expressed as either:
1. Loss ratios, or
2. Absolute amounts
 Reinsurance

3. Quota Share Contracts

Proportional Reinsurance
Ceding insurer and
assuming reinsurer share
an agreed portion or
percentage of original
premiums and subsequent
losses in respect of the
reinsured business.

Quota Share Contracts have 2 types of

limits:

1.Per risk limit

2.Aggregate exposure
limit
 Reinsurance

3. Quota Share Contracts

Aggregate exposure limit
Reinsurer imposes a limit on aggregate
exposure (total sums insured). A breach of
$6m
this limit will mean an averaging down
$5m of the QS cover.

}
$4m

$3m

$2m $4m per risk

75% Quota Share limit
$1m
 Reinsurance

3. Quota Share Contracts

Aggregate exposure limit
Profit Commission
Reinsurer imposes a limit on aggregate
With (total
exposure extensive reinsurance
sums insured). A breach of
$6m
thiscover inmean
limit will the lower layers, down
an averaging
$5m insurers
of the QS cover.may allow underwriting
standards to drop (in order to

}
$4m
gain market share) & this
$3m
reduces underwriting profit.
To counteract this,$4m
QS contracts
per risk
$2m
75% Quota Share typically allow a retroactive
limit
$1m payment from the reinsurer of,
say, 20% of its profit on the
contract.
 Reinsurance
4. Surplus Treaty Contracts

Surplus Treaty

Ceding insurer retains a specified amount – called the line.

The amount ceded to the reinsurer is defined as a specified number of
lines.
Example: 4 line surplus treaty of
$1m
$6m

$5m

$4m
Reinsurance cover
$3m for 4 x retention in a
4 line surplus treaty.
$2m NOTE – 100% COVER
FOR THESE CEDED
$1m LINES.
Retention
 Reinsurance
4. Surplus Treaty Contracts

Example: 4 line surplus treaty of

$1m
$6m

$5m 1Cedant retains all premiums and claims.

$4m

$3m
premium

2 Cedant retains 25% of premiums and

2 claims. Reinsurer assumes 75% of
$2m
premiums and claims.

$1m
premium

1
 Reinsurance
What type of reinsurance contract
suits the loss scenarios in these lines
of business?
Household Fire & Property
Contents (Non- Catastrophe
catastrophe)
Amount

Workers’ Motor
Compensation

Time
 Reinsurance

Motor
Property
Catastrophe
Household Fire
& Contents
(Non-
catastrophe)
Workers’
Amount

Compensation

Time
 Reinsurance
The Ideal Reinsurance Program?
Motor
Catastrophe XL. Property
Catastrophe
2 reinstatements to
cover 3 events in Household Fire
total. & Contents
Casualty XL. (Non-
catastrophe)
3 reinstatements on
bottom layer to cover 4 Workers’
events. Compensation
Quota Share.
To cover
Amount

attritional losses
in all lines of
business.

Claims Arranged by Line of Business