Non-proportional Reinsurance
Michael Eves
Agenda
• Description
• Why
• Structure and pricing
• Effects for ceding company
• Reinsurer risk
• Miscellaneous
Non-proportional Reinsurance -
description
• Non-proportional reinsurance transfers losses beyond a certain
threshold (retention) from cedants to reinsurers, be it for single
losses (per risk excess of loss), events (catastrophe excess of
loss), entire portfolios over a given time period (aggregate
excess of loss, stop loss) or a combination thereof.
• Prices for non-proportional reinsurance are agreed upon
between cedants and reinsurers. This can be done through
direct negotiations or through (reinsurance) brokers. It is usual
that comprehensive information – on current exposures as well
as on loss history – will be made available to reinsurers in order
to allow an assessment of the risk profile of the exposures
reinsured.
Non-proportional Reinsurance - why
Reinsurance can be a powerful risk management tool for insurance
undertakings (cedants). It allows an insurer to transfer significant
parts of risk to third parties (reinsurers) for a set premium. The
main purpose for many cedants is to get a capital relief, while
reinsurers effectively manage capital through worldwide
diversification. This is especially true for non-proportional
reinsurance, as it allows the cedant to substitute substantial
(expensive) amounts of its capital with lower (cheaper) capital of
reinsurers as they are able to turn worldwide diversification effects
into capital credit. In this sense reinsurers do nothing other than
apply the "principle of insurance" for insurance undertakings in the
same way as insurance undertakings provide the "principle of
insurance" for their clients.
Non-proportional Reinsurance
Type: Excess of Loss Reinsurance
Aggregate Excess of Loss
Stop Loss
Pricing: Experience Based methods
Exposure Based methods
Effects of Non-proportional
Reinsurance for the ceding company
- Volatility reduction of results
- Diversification Improvement
- Improvement of risk and return
- Capacity increase
- Qualitative Effects
Reinsurer Risk
• reinsuring business brings with it a risk of
reinsurer default
• reinsurance risk books tend to be more
diversified than those of insurers
• little or no correlation between large natural
catastrophe risks, eg windstorm and earthquake
• even for a reinsurer market risk is significant
• reinsurers have credit ratings and are normally
regulated in the same way as direct insurers
Non-proportional Reinsurance –
other points
- Solvency Ratio Improvement
- Rating impact
- Powerful Risk Management Tool
- Risk of Reinsurer Default
- Complimentary Risk Mitigation Instruments,
for example:
- Industry Loss Warranties
- Catastrophe Bonds
- Catastrophe Swaps
- Other forms of securitisation
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