Factor Affecting Reinsurance Needs

The following are the main reasons to affect the reinsurance needs

1).Growth plans
2).Types of insurance sold
3).Geographic spread of loss exposures
4).Insurer size
5).Insurer structure
6).Insurer financial strength
7).Senior management’s risk tolerance

1).Growth Plans: -

A primary insurer that expects rapid premium growth is likely to need more reinsurance than a primary insurer that expects premium volume to remain stable or to decrease.

2).Types of Insurance Sold

The types of insurance that a primary insurer sells are a major determinant of its reinsurance needs. The insurance products offered by primary insurers Vary in loss stability, which affects the primary insurer’s ability to project loss experience. A reinsurance program must be tailored to the loss characteristics of the insurance that the primary insurer sells.

3).Geographic Spread of Loss Exposures

Another determinant of a primary insurer’s reinsurance needs is the geo-graphic spread of its loss exposures. A wide geographic Spread may stabilize the insurer’s loss ratio and minimize reinsurance needs, especially in property insurance. While no part of the world is completely immune to natural catastrophes, the nature of catastrophe loss exposures differs by geographic area and catastrophes seldom strike all geographic areas simultaneously. Consequently, if a property insurer’s insured loss exposures are spread over a wide geographic area, poor loss experience in one area may be offset by good loss experience in mother area during a given period.

4).Insurer Size

Insurer size is also an important determinant of reinsurance needs. Typically, small primary insurers need proportionately more reinsurance to stabilize loss ratios than large primary insurers. According to the law of large numbers, actual losses tend to approach expected losses as the number of loss exposuresincreases. Therefore, the loss ratio of a large primary insurer is likely to be more stable than the loss ratio of a small one even if the mix of business sold is identical.

5).Insurer Structure

The legal form of a primary insurer may affect its reinsurance needs. For example, stock insurers have more access to capital markets than mutual and reciprocal insurers. They may consequently be willing to accept less stability in their loss ratios and depend on capital markets to replace the policyholders surplus depleted by adverse loss fluctuations. This could be risky however because the providers of capital may not look favorably on an insurer that has just sustained heavy losses.

6).Insurer Financial Strength

An insurer that 15 financially strong needs less reinsurance than a financially weaker one for two reasons. First, it does not need surplus relief to increase its premium capacity. Second, it needs less reinsurance to stabilize its loss ratio. A stronger surplus position enables the primary insurer to absorb more adverse loss ratio vmiations. The resulting lower reinsurance costs are an added advantage for a fmancially strong primary insurer. One aspect of evaluating an insurer’s Financial strength involves assessing the stability and liquidity of its invested assets. If a primary insurer’s strategy is to rely on its policyholders’ surplus to absorb abnormal losses, that policyholders’ surplus must be invested in assets that are readily marketable and not subject to wide fluctuations in market price. Otherwise, the primary insurer’s financial resources may be insufficient to pay losses in a timely manner.

7).Senior Management’s Risk Tolerance

The decision of how much reinsurance and what types to buy is made by the primary insurer’s senior management. Although the decision may be sup ported by statistical data and financial models, it usually reflects the senior management’s risk tolerance, which is their willingness to assume risk. Senior management must be comfortable with the insurance risk assumed, particularly when setting retentions or changing the reinsurance program.

Senior management must be confident that other stakeholders are comfortable with the adequacy of the primary insurer’s reinsurance program. For example, the reinsurance program should reflect the risk tolerance of the board of directors, stockholders, or policyholders in a mutual company. Senior management must be sensitive to those stakeholders’ views.The practical effect of any proposed reinsurance program changes on supera visors and underwriters must also be considered. For example, if treaty reinsurance is used to increase large-Line capacity, then individual underwriters must adjust to the higher amounts of insurance that the primary insurer