OESAI COMPREHENSIVE LIFE INSURANCE TECHNICAL TRAINING

Reinsuring Small Limited-Underwriting VS Reinsuring Small Limited-Underwriting VS. fully Underwriting large amount policies OESAI COMPREHENSIVE LIFE INSURANCE TECHNICAL TRAINING Ezekiel Macharia Group Actuary - Jubilee Holdings Limited Day 1, Wednesday 11th November, 2015

AGENDA Components of premium Policy Characteristics Claim Characteristics Role of Reinsurance Facultative vs Treaty Quota Share Surplus Excess of Loss Conclusion

Components of premium Profit is usually based on hurdle rate of company (10% - 30%) depending on risk free rate

Reinsurance renewals??

Impact of reinsurance The more you reinsure the more profit you give away? Why reinsure?

Policy Characteristics Small Limited Underwriting Large – full underwriting Micro Life Insure all lives in Tanzania (50m) for $100 = $5b Key man Insure 100 for $50m each = $5b Mass Market All demographics are covered High Net Worth (HNW) A portion of the demographics Law of Large Numbers Works Law of Large Numbers May not work Many claims Administrative costs can be a key cost Few claims Administrative cost are not significant Reinsurance (Quota Share, Surplus, XOL)

Claim Characteristics Small Limited Underwriting Large – full underwriting Regular claims per month Using a claim distribution with a incidence rate of 3 per mille Limited or no claims With 100 lives a chance of no claim is possible

Role of Reinsurance Risk Transfer (both cases) Mitigate losses (stability) Increase capacity (insure more clients) Strengthen balance sheet (confidence) Technical support (underwriting large & complex individual risk)

Reinsurance Treaty: Relationship (like a marriage) Pre-negotiated No-individual underwriting Facultative: Can be one-off no obligation on both sides

Quota Share A proportionate share of the premium and claims For example, the reinsurer receives 30% of premium and pays 30% of claims

Quota Share Example: Insurer pays 70%, Reinsurer pays 30% of claims Reinsurer follows the fortunes of the insurer

Surplus A proportionate share of the premium and claims subject to a maximum proportion per claim

Surplus Example: Insurer pays 70% (maximum - $10m), Reinsurer pay 30% of claims Insurer is more protected

Excess of Loss Pays claims beyond a certain limit For example, claims beyond $100m are paid by reinsurer. The reinsurer may give a limit of claims they will pay and the additional claims reverts to the insurer.

Excess of Loss Example: Reinsurer pays claims above $100m – subject to a maximum of another $100 – claims above $200m revert back to insurer

Conclusion Reinsurance is important to provide capacity and training to large risks Limited underwritten polices require bulk reinsurance like Excess of Loss & Quota Share Fully underwritten policies tend to be large and require surplus reinsurance in addition to excess of loss Reinsurance has a cost

? QUESTIONS ezekiel.macharia@gmail.com +254 722 540 045