Risk Management and Reinsurance Flashcards

Flashcards covering key concepts related to risk management, reinsurance, and alternative risk transfer strategies, based on lecture notes.

When faced with a risk, what options does each stakeholder have?

Avoid the risk, Reduce the risk, Reject the need for financial coverage, Retain in full, Transfer in full, Partly retain and partly transfer

What factors influence the choice of mitigation approach for risks?

Impact on frequency and severity of the risk, Feasibility of implementation, Cost and impact on profit, Secondary risks arising, Overall impact on NPV

What factors determine the extent of risk transfer?

Probability of the risk occurring, Risk appetite, Existing resources, Cost of transferring the risk, Willingness of a third party

What is a treaty in the context of reinsurance?

Contract covering a group of policies.

What are the three forms a treaty can take?

Obligatory: terms set as per the treaty, Obligatory-facultative: insurer chooses risks to cede, Facultative (treaty): each risk is offered separately

What does EML stand for in reinsurance?

Maximum loss that could arise from a single event (underwriter’s opinion).

What are the benefits of reinsurance?

Smoother profits, reduced capital requirements, increased capacity to write more business and achieve diversification, limitation of large losses

What are the costs of reinsurance?

Reinsurers add their own profit margin, they introduce credit risk, appropriateness of cover.

What is proportional reinsurance?

A % of each risk, determined at the outset by the treaty, is ceded to the reinsurer

What is quota share reinsurance and what are its advantages?

A fixed percentage of each and every risk is reinsured; spreads risk, simple to administer, improves solvency, helps diversify.

What is surplus reinsurance?

Treaty specifies a retention limit and a maximum level of cover available from reinsurer

What is non-proportional reinsurance (excess of loss)?

Reinsurer indemnifies for the amount of any loss above a stated excess point

What is Risk XL in reinsurance?

Individual losses affecting one insured risk at a time.

What is Aggregate XL reinsurance?

Covers the aggregate of losses above an excess point from a defined peril over a defined period.

What is Stop Loss reinsurance?

Provides cover based on total claims from all perils on a ceding company’s whole account.

What is Catastrophe XL reinsurance?

Pays out if a catastrophe as defined in the reinsurance contract occurs.

What is alternative risk transfer (ART)?

Tailor-made solution for risks that the conventional reinsurance market regards as uninsurable.

What are Integrated risk covers?

Risks are aggregated and reinsured in one block, including financial risks.

What is Securitization (catastrophe bonds)?

Turning a risk into a financial security transferring insurance risk to the banking system.

What is Post loss funding?

Raising capital to cover the losses from a risk after the risk event has happened.

What are Insurance derivatives?

OTC or exchange traded, tailored to meet specific needs.

What are Swaps in alternative risk transfer?

Swap negatively correlated risks.

Reasons why providers take out ART contracts

Provisions of cover that might otherwise be unavailable, stabilisation of results, cheaper cover, tax advantages

What risks can be transferred using financial derivatives?

Transfer market risk and some types of credit risk.

How a product design can be used to transfer risk?

With profits, Unit linked, Excess / deductibles, Maximum payments

What does EML represent?

Biggest claim the underwriter think is likely to occur

What are the key characteristics of surplus reinsurance?

Requires complex calculated for every risk, retention limit can be specified pre risk, complex calculations needed for every risk

What variables would be modelled stochastically for risk finacing?

Claims experience – frequency and severity