ReinsuranceExample: Stabilization and Catastrophe ProtectionExample: Stabilization and Catastrophe Protection (cont.)Insurance / Reinsurance ParallelsTypes of ReinsuranceTypes of Reinsurance (cont.)Slide 7Example: Reinsurance ProgramExample: Reinsurance Program (cont.)Other Reinsurance Program IssuesThe Reinsurance MarketplaceThe Reinsurance Marketplace (cont.)Alternatives to “Traditional” ReinsuranceBeyond “Traditional” ReinsuranceReinsurance•Insurers purchase reinsurance largely for the same reasons that people and organizations purchase insurance•“Insurance for insurers”•Functions of reinsurance–Capacity: can write more business and larger policy limits–Financial: can alter timing of income (and thus financial results)–Stabilization (of underwriting results)–Catastrophe protection–Underwriting adviceExample: Stabilization and Catastrophe Protection Total Losses With Catastrophes(Estimated from A.M. Best's Aggregates &Averages, 1999)90951001051101151201987 1992 1997Calendar YearCombined RatioNon-Cat Losses Cat LossesExample: Stabilization and Catastrophe Protection (cont.) Total Losses Without Catastrophes(Estimated from A.M. Best's Aggregates &Averages, 1999)90951001051101151201987 1992 1997Calendar YearCombined RatioInsurance / Reinsurance Parallels Insurer(policy limit)Reinsurer (policy limit) Insurer(pays “retention”)Policyholder (pays deductible)Policyholderpays premiumto insurerInsurerindemnifiesagainst lossInsurer “cedes”part of premiumto reinsurerReinsurer“assumes”responsibilityfor part of lossTypes of Reinsurance•Treaty versus facultative–Treaty: reinsures a group of the insurer’s policies–Facultative: reinsures a specific risk written by the insurer•Proportional versus excess (non-proportional)–Proportional (pro rata): losses and premiums split between insurer and reinsurer on a percentage basis–Excess-of-loss: reinsures losses above a certain amountTypes of Reinsurance (cont.)•Forms of pro rata reinsurance–Quota share: reinsurer pays a fixed percentage of each policy’s losses, and receives a fixed percentage of the original premium–Surplus share: reinsurer’s share varies by policy (according to policy limit)Types of Reinsurance (cont.)•Forms of excess-of-loss reinsurance–Per risk: covers individual losses from each policy or risk (common for property coverages)–Per occurrence cover: covers losses from each event or occurrence, across all policies (common for casualty coverages)•Working layer•Clash covers–Per occurrence / catastrophe cover: covers a single large event (e.g., natural catastrophe)–Stop-loss / aggregate excess: protects net resultsExample: Reinsurance Program•Suppose a primary insurer writes policies with the following characteristics:–Homeowners policies–$1,000 deductible, $200,000 policy limit•Suppose the insurer has the following reinsurance program in place:–Quota share: cede 60% of first $ 100,000 of each loss–Per-risk excess: $ 90,000 x/s $ 50,000–The quota share “inures to the benefit of” the per-risk excessExample: Reinsurance Program (cont.)•How would each of the following losses be split? Policy- Primary Q/S Excess Loss holder Insurer Reinsurer Reinsurer$ 500 20,000111,000121,000251,000Other Reinsurance Program Issues•Pricing of reinsurance policies–Proportional: percentage of premium ceded (often with a “ceding commission” paid back to the primary insurer to cover expenses)–Excess: rate applied to primary insurer’s original premiums, in accordance with expected frequency and severity of losses to reinsurance layer•Multiple reinsurers on a reinsurance contract•Retrocessions–Reinsurance for reinsurers–Where does an original dollar of loss eventually end up?The Reinsurance Marketplace•Direct versus broker markets• Types of reinsurers–Professional reinsurers–Reinsurance departments / divisions of primary insurers–Government organizations, pools, and associations–Lloyd’s of LondonThe Reinsurance Marketplace (cont.)•Some of the major players–General Re / Berkshire Hathaway–American Re–Employers Re–Zurich Re–Everest Re–Swiss Re–St. Paul Re–SCOR ReAlternatives to “Traditional” Reinsurance•Reinsurance is one of many “risk management” tools at the disposal of a primary insurer -- e.g., –Refuse to write certain risks–“Co-insurance”–Reinsurance–Capital market / financial solutionsBeyond “Traditional” Reinsurance•“Newer” reinsurance products–Portfolio reinsurance–Finite (financial) reinsurance•Very recent advances–Integrated risk policies–Insurance securitization•Interestingly, although some of these recent advances might be considered competitors of traditional reinsurance, many reinsurers have themselves embraced these new