Question

Reinsurance can be used by an insurance company to solve several problems. Assume you are an insurance consultant who is asked to give recommendations concerning the type of reinsurance plan or arrangement to use. For each of the following situations, indicate the type of reinsurance plan or arrangement that ceding insurer should use, and explain the reasons for your answer.

1. Company ABC is an established homeowners insurer and is primarily interested in having protection against a catastrophic loss arising out of a single fire occurrence.

2. Company XYZ is a rapidly growing new company and desires a plan of reinsurance that will reduce the drain on its surplus (i.e. Company Farmers wants to reduce unearned written premiums) because of the expense of writing a large volume of new business.

3. Company Aviation has received an application to write a $1000 million property damage and bodily injury liability for a large jet plane. Before the policy is issued, the underwriter wants to make certain that adequate reinsurance is available.

Answer 1

a. Company ABC is an established homeowners insurer and is primarily interested in having protection against a catastrophic loss arising out of a single fire occurrence.

Excess of loss treaty should be used for company ABC, since it seeks protection against a catastrophic loss airing out of single occurrence. Excess of loss treaty is a sub type to treaty reinsurance that is specifically designed for catastrophic protection. It can be written to cover single exposure or single occurrence such as tornado or earthquake

b. Company XYZ is a rapidly growing new company and desires a plan of reinsurance that will reduce the drain on its surplus (i.e. Company Farmers wants to reduce unearned written premiums) because of the expense of writing a large volume of new business

Quota Share Treaty will help company XYZ to reduce the drain on its surplus. In this situation the insurer and reinsurer share premiums and losses based on the fixed percentage. Also, all of the unearned premiums are reduced for the primary insurer which makes it effective for new businesses to reduce the drain on surplus

c. Company Aviation has received an application to write a $1000 million property damage and bodily injury liability for a large jet plane. Before the policy is issued, the underwriter wants to make certain that adequate reinsurance is available.

Facultative reinsurance will help Company Aviation to cover single risk of property damage and bodily injury liability for a large jet plane. Facultative reinsurance is considered to be more of a one-off transactional deal which is the case here