1. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 1 1.6 Reinsurance Xchanging Premium Technical Training Programme Module 1 – Introduction to the Business

2. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 2 Contents What is reinsurance? The benefits of reinsurance. What is Treaty Reinsurance? –Excess of Loss & Proportional What is Facultative Reinsurance? The difference between Facultative & Treaty reinsurance.

3. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 3 What is Reinsurance? Just as individuals and businesses may feel the need to transfer risk, so too do insurers. Hence, the insurers insure the risk again, which is called reinsurance. Reinsurance is basically an extension of the concept of insurance, in that it passes on part of the risk. …… it is insurance of insurance

4. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 4 Purchasing Insurance Policy Policy of of Insurance Insurance ABC Insurance Company assess the risk Premium agreed ….to demonstrate Reinsurance we need to go back to the basics

5. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 5 Insurance Company’s Liability = £ millions = £ millions

6. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 6 Both parties can insure their liability Insurance to safe guard against loss ABC Insurance Company Reinsurance to safe guard against loss

7. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 7 What do you think are the benefits of Reinsurance to Insurers & the economy? Group work ………….10 minutes

8. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 8 The Reinsurance Market As with the insurance market, the reinsurance market involves dealings between sellers, buyers and brokers. The parties involved in reinsurance are called:- – Reinsured/Cedent (Buyer of reinsurance cover eg Insurance Companies, Lloyd’s Syndicates, other Reinsurers) – Reinsurer (Seller of reinsurance cover eg Insurance Companies, Lloyd’s Syndicates, other Reinsurers) Reinsurers accept risks either directly from insurers or through reinsurance brokers.

9. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 9 Reinsurance is an International Business Reinsurance is an international business. The UK reinsurance market transacts most of its business in the City of London. Insurers usually spread their risks over a number of reinsurers – “subscription market business” placed in the same way as an insurance risk in the London market Many Lloyd’s syndicates and insurance companies buy and sell reinsurance.

10. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 10 Subscription Market A Lloyd’s syndicate requires reinsurance for £1,000,000 to cover their motor account – broker arranges cover via slip Lead underwriter accepts 30% of risk = £300,000 Following Underwriter 4 accepts 12% of risk = £120,000 Following Underwriter 5 accepts 20% of risk = £200,000 Following Underwriter 3 accepts 20% of risk = £200,000 Following Underwriter 2 accepts 18% of risk = £180,000 Broker approaches each u/wr in turn and they accept a % of the risk until 100% is placed

11. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 11 Methods of Reinsurance …there are 2 methods of Reinsurance Facultative Treaty Reinsurance What is the difference between Facultative & Treaty Reinsurance?

12. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 12 What is Treaty Reinsurance ?

13. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 13 Purchasing Insurance Policy Policy Of Of Insurance Insurance ABC Insurance Company Company …car insurance cover typically arranged in 15 minutes

14. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 14 Purchasing Reinsurance ABC Insurance Company Company Reinsurers RIPolicy Policy Policy Of OfInsurance ABC Insurance Company Company START …this would make purchasing car insurance very time consuming completed

15. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 15 A Reinsurance Treaty is made R/I Treaty R/I Treaty InsurerReinsurer A Treaty is an advance reinsurance agreement

16. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 16 What the Treaty Contains The type of risk to be reinsured – standard risks for whole account The period of cover The limit of liability/conditions The premium rate. R/I Treaty R/I Treaty InsurerReinsurer

17. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 17 Purchasing Insurance ABC Insurance Company Company Reinsurers RIPolicy Policy Policy Of OfInsurance ABC Insurance Company Company START completed X X X X …..having a Treaty in place removes these steps for the public

18. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 18 2 Types of Treaty Reinsurance Treaty Reinsurance ProportionalNon-Proportional Treaty Statements Excess of Loss Every premium & every claim is shared between insurer & Reinsurer in fixed % The premium is agreed at placing and only when total claims exceed an agreed amount can the insurers use their reinsurance protection.

19. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 19 Recap on Treaty Reinsurance Treaties are used to cover a whole account for standard risks –Set up in advance –Cover is automatic - there is no individual risk assessment needed by Reinsurers. –Cost effective to set-up. Treaty Reinsurance can be either:- (1) Proportional Treaty - every premium & every claim is shared between insurer & Reinsurer in fixed % (2) Excess of Loss (Non-Proportional), a premium is agreed at placing and only when total claims exceed an agreed amount can the insurers use their reinsurance protection.

20. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 20 What is Facultative Reinsurance ?

21. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 21 Can a treaty cover every risk the insurer accepts? Would a treaty cover all of these risks? Petrol tanker would be outside of the scope of a standard motor treaty

22. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 22 Facultative Reinsurance Individual Risk - reinsured on an individual basis Facultative Facultative

23. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 23 Treaty Vs Facultative Whole Account/book of business – standard risksIndividual Risks – more hazardous/costly Treaty Treaty Facultative Facultative

24. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 24 Buildings Insurance Individual Risks – more hazardous/costly Treaty TreatyFacultative insurers would not reinsure the stately home under their treaty Whole Account/book of business – standard risks

25. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 25 Life insurance Individual Risks – more hazardous lifestyle/costly risk Treaty TreatyFacultative insurers could not reinsure “the Beckhams” life under their treaty Whole Account/book of business – standard risks

26. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 26 Arranging Facultative R/I An insurance company requires reinsurance for $645,000,000 to cover this piece of art Lead underwriter accepts 30% of risk = $193,500,000 Following Underwriter 4 accepts 12% of risk = $77,400,000 Following Underwriter 5 accepts 20% of risk = $129,000,000 Following Underwriter 3 accepts 20% of risk = $129,000,000 Following Underwriter 2 accepts 18% of risk = $116,100,000 Broker approaches each u/wr in turn and they accept a % of the risk until 100% is placed

27. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 27 Reinsurance of Reinsurance is called a retrocession Reinsurance Spiral As you rise up the reinsurance spiral less and less of the risk is being reinsured. Base of spiral represents the amount of the original insurance risk that was first covered by reinsurance Reinsurers can again reinsure their liability -

28. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 28 Recap on Reinsurance Reinsurance is insurance of insurance Two methods of Reinsurance are:- (1) Treaty Set up in advance for whole account for standard risks. More cost effective to set-up. Cover is automatic - there is no individual risk assessment needed by Reinsurers. (2) Facultative Larger individual risks More expensive to arrange, as each risk is individually assessed Treaty Reinsurance can be either:- (1) Proportional Treaty - every premium & every claim is shared between insurer & Reinsurer in a fixed % (2) Excess of Loss (Non-Proportional) - a premium is agreed at placing and only when total claims exceed an agreed amount can the insurers use their reinsurance protection.  Reinsurance risks are placed in the London Market via a Broker  Insurance Companies & Lloyd’s syndicates act as Insurers & Reinsurers  Reinsurance of Reinsurance is called a retrocession. Risks can be reinsured again and again.

29. Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging. 29 Break