SCI CRI – Certificate in Reinsurance Exam Set Two

In the case of CAT Bonds, the definitions describing an event are different and more precise, because investors tend to be familiar with the concept of an event and rely on the form of CAT Bond. Of eg, mostly in the situation of the CAT Bond parametric windstorm, the cluster clause is commonly used.

The concept of a triggering incident is based on the average wind speed recorded at the European Qualified Stations, the data received by the meteorological agencies. The station is activated if it leads to a maximum wind speed higher than the threshold. For a group of at least four stations, a border is drawn around these activated stations. The cluster must be sequentially related for a minimum of 3 hours.  

Many more variants of this are possible in terms of: the proportion of the franchise or the excess margin, the option of the base index (for example, the nation retail price index (RPI) or the salary and incomes of all or different classes of employees) and the date from which the base index starts to operate.

The arrangement of the XL can be constrained by an aggregate excess: the reinsurer shall indemnify the insurance provider (reinsured) for a gross (or cumulative) number of damages in default of the stated aggregate sum.

We extend the gross amount only to losses in the amount of the XL limit (e.g. $500,000 in the gross in excess of $500,000 in the aggregate or for losses in excess of $50,000 per loss).

Remember that policy programs may apply by policy and not by risk. It is especially useful in the manufacturing sector because there are often multi-site plans (only once in the case of multiple locations with the same scheme that are caused by the reassurance deductible). Programs are perchance, except for companies specializing in industrial underwriting.

There are time provisions defining how many hours a given time frame will be covered. For eg, the windstorm will take 72 hours. But, if there is an atmospheric disturbance that lasts for 6 days, it should not be treated as one occurrence, but as two separate events. In the case of an ambient disturbance lasting 4 days, the resultant net damage would find just 3 neighboring days.

The insurer as a risk warehouse: The first one, the most conventional one, is a risk endorser, more specifically a risk warehouse. Under this arrangement, the insurer accepts and retains the liabilities of the policyholder. Although the financial markets are the ultimate risk-taking entity, they cover all risks, with little distinction of existence or roots.

Under this scheme, the liability assumed by the insurer is automatically shifted to the capital markets across a range of financial instruments. Theoretically, the insurer has no insurance risk, other than as a symbol for markets (the equivalent of a brand for the insurance company). The residual risk is compensated by economic capital and then by operational risk.

XL attachment point: 3 M
XL limit: 5 M
XL capacity: 3 + 5 = 8 M
as a = XL attachement point or retention, b = XL limit and, a + b = limit or capacity

With the XL agreement, any loss that is less than or equal to the attachment point shall remain at the expense of the insurer. The insurer must, therefore, compensate the value of the attachment point for each loss in excess of the above since it is decided that the resulting claims will be compensated by the reinsurers.

Capital Diversification Rule: Gross premium volume / Capital + Loss reserves = approximately 200 percent.
If we over-rely on reinsurance as a source of capital, we may face higher financial costs (potentially through dependence on reinsurers). Implementing such a condition is a way of ensuring that capital is largely in line with our total non-reinsurance risk. This law is also a guideline on liquidity.

Upon proportional reassurance, the overall risk exposure (net capacity) would be in line with the risk premium, otherwise non-proportional reassurance will tolerate too much risk:
Net Capacity/Net Premiums < 10%

So far as vehicles are concerned, the incident affecting many policy holders of the company would usually be deemed to be a single occurrence from the point of view of reinsurance, while from the point of view of direct compensation, there are typically as many vents as the policy holders involved.

The reinsurer shall interfere if the risk of the case is greater than b. It shall then pay the costs of the event subject to deductible b, but not more than a sum. Accordingly, the term aXSb means that the reinsurer spends at most a portion of the sum approaching b. For reassurance jargon, b is the Treaty priority; an is the Treaty guarantee; and + b is the Treaty limit.

Per risk systems with a total number of re-establishments (and reciprocal plans) have a cap per case: stop the operation of the system when multiple threats are caused due to the same incident.

The ACOD / B section defines the reassurance process for exposure-based policies. To order to prevent this situation, the ACOD/B provision states that maintenance and restriction must be separated between the years of access.

In the case of non-proportional reinsurance, the price of a sheet is typically expressed as a percentage of the premium base term. It is due to the fact that the premium base and therefore the risk is still not necessarily understood at the beginning of the year: the calculation of the insurance premium as a percentage of the premium base makes it easier to change the reinsurance rate at the end of the year.

This tells us that considerations such as frictional capital costs, including tax shelters, business and financial loss charges, need to be weighed in order for insurance asset-structure decisions (including reinsurance) to matter in any practical way.

Stop-loss is a non-proportional form of reassurance that functions in the same manner as over-loss reassurance. While the over-loss is related to a single loss number, either perchance or per case, the over-loss is applied to the overall amount of claims of the portfolio.

Either the maintenance and the cap can be expressed as a sum, as a percentage of the premium (classical) or as a percentage of the overall insured amount. Stop-loss is a perfect protection for the insurer. Nonetheless, owing to its variability in pricing and certain knowledge problems, the expense of avoiding failure is usually high, reducing its practical application.

In the case of CAT Bonds, the clauses describing the event are different and more precise, because investors tend to be familiar with the description of the event and rely on the form of CAT Bond. For eg, in the case of a CAT Bond parametric windstorm, the cluster clause is usually used.

From the perspective of the insurer, it can be viewed as a payment paid by the policyholders to the insurer in the form of a fee that can be refunded in the case of a default (a conditional setback).

We note an Excess of Loss, b X a with: a = XL attachment point or retention, b = XL limit and a + b = limit or capacity
XL attachement point : 3 M, XL limit : 5 M and XL capacity: 3 + 5 = 8 M

This distinction makes the positioning of the treaties simpler, as each reinsurer can select the degree of uncertainty of its exposure to the client by spending more or less in each tier, the highest being, evidently, the more “risky” ones, because they apply to the tails of the distributions. They only require fees when a very high threshold is being crossed.

The Directive plans to: enforce fiduciary rules in line with the rules applied to insurers and to automatically recognize the reserve of reinsurers as eligible assets. (This is a big change in France, where the insurance law did not accept the reinsurance as a qualifying asset because it was not a collateralized asset).

The use of reinsurance in the cat bond scheme is simply a technological tool. The Special Purpose Vehicle (SPV) is necessary to turn the obligation into an asset that is easy to move and liquid.

It would become quite difficult to comply with the so-called “mixed” claim: daily payments obey the SC while all annuity payments are controlled by the IAC. It is going to lead to disagreements. Third, it is not appropriate to have a different IAC, because all the properties of the Indexed Annuity fall seamlessly into the SC.

The key worry of the reinsurer is to receive a reasonably high premium, while the insurer needs to pay a reasonable premium. There are three different incentives.