26th Jul 2021, By Utsav Maggu
There is a risk to insurance companies that claims experience is more volatile than expected and that a single large claim or an accumulation of claims or a catastrophe renders the insurance company insolvent. Reinsurance is a way of reducing or transferring some of these risks and thus insurance companies seek insurance with reinsurance companies.
Actuaries advise on obtaining appropriate and adequate reinsurance to protect the business of an insurance company. The reinsurance companies will also wish to make a profit from the risks they take on. Effectively part of the profit from the business of insurance companies is passed on to reinsurance companies.
In assessing risks and rewards, the actuary places a realistic estimate on the value of the benefits that would be paid by the reinsurance companies. This is likely to be lower than the cost of the reinsurance charged to the insurer, as the reinsurance premium will include loadings for profits and contingencies. A decision must be made which balances risks against the costs of mitigating them.
Reinsurance contracts involve paying a premium to reinsurance companies. The actuary usually calculates a realistic point estimate of the net cost of reinsurance (i.e. the reinsurance premium less the expected benefits) together with a range over which this net cost may vary depending on experience. This information will assist the insurance company in understanding how reinsurance will affect its position and aid the risk management decision-making process.
In addition to the relative costs and the variability of those costs, the liquidity risk of retaining the risk or buying reinsurance also needs to be considered in making a decision. A key factor to note is that the reinsurer may be able to offer very competitive terms for administration, actuarial services and other insurance advice if a reinsurance contract is purchased.
There are a variety of ways in which the liabilities arising under an insurance contract can be reinsured. Some types of reinsurance completely remove a risk from an insurance company. Many others leave the liability with the insurer but provide a payment to the insurer that is aimed at covering that liability. Reinsurance may be arranged on a case-by-case basis (‘facultative’) or a defined series of risks may be covered (‘treaty’).
We, Lux Actuaries and Consultants, provide a complete solution to assess the appropriateness of the current reinsurance in place for our clients. Specifically, we cover the following:
Contact us to find out more.
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