[00:00.00]Reinsurance in property and liability insurance
[00:03.58]There are two essential ways in which risk is shared under reinsurance agreements in the field of property and liabity insurance.
[00:12.09]The reinsurance agreements may repuire the reinsurer to share in every loss that occurs to a reinsureed risk,or it may require the reisurer to pay only after a loss reaches a certain size.
[00:24.92]Quota share treaties and surplus treaties fall in the first category,while excess-loss treaties comprise the second.
[00:33.12]·HEADING A
[00:34.72]Under a quota share treaty,the direct-writing company and the reinsurance company agree to share the amount of each risk on some percentage basis.
[00:44.67]Thus,the ABC Mutual Insurance Company(the direct writer)may have a 50% quota share treaty with the DEF Reinsurance Company(reinsurer).
[00:55.98]Under such an agreement,the DEF Reinsurance Company will pay 50% of any losses arising from those risks subject to the reinsurance treaty.
[01:06.82]In return the ABC Mutual Insurance Company will pay the DEF Reinsurance Company 50% of the premiums it receives from the insureds.
[01:16.49](with a reasonable allowance made to ABC for the agent's*commission and expenses connected with putting the business on the books).
[01:24.90]·HEADING B
[01:26.54]Under a surplus treaty,the reinsurer agrees to accept some amount of insurance on each risk in excess of a specified net retention.
[01:35.92]Normally,the amount the reinsurer is obligated to accept is referred to as a number of "lines" and is expressed as some multiple of the retention.
[01:45.69]A given treaty might spectify a net retention of $10,000,with five "lines."
[01:52.12]Under such a treaty,if the direct writer writes a $10,000 policy,no reinsurance is involved,
[02:00.42]but the reinsurer will accept the excess of policies over $10,000 up to $50,000.
[02:07.92]These treaties may be "first-surplus treaties","second-surplus",and so on.
[02:14.58]A second-surplus treaty fits over a first-surplus treaty,assuming any excess of the first treaty,and so on for a third or fourth treaty.
[02:24.67]To illustrate,let us assume that the ABC Mutual Insurance Company,
[02:30.20]has a first-surplus treaty with a $10,000 net retention and five lines with the DEF Reinsurance Company and a second-surplus treaty with the GHI Reinsurance Company,also with five lines.
[02:46.48]If ABC sells a $100,000 policy,it must,under the terms of both agreements,retain $10,000.
[02:56.04]The DEF Reinsurance Company will then assume $50,000 and GHI will assume $40,000:
[03:04.69]ABC Mutual Insurance Company $10,000
[03:09.34]DEF Reinsurance Company 50,000
[03:13.28]GHI Reinsurance Company 40,000
[03:17.02]Any loss under this policy would be shared on the basis of the amount of total insurance each company carries.
[03:24.41]Thus,ABC would pay 10% of any loss,DEF would pay 50%,and GHI would pay 40%.
[03:34.73]The premium would be divided in the same proportion,
[03:38.31]again with a reasonable allowance from the reinsurers to the direct writer for the expense of putting the policy on the books.
[03:46.32]·HEADING C
[03:47.97]Under an excess-loss treaty,the reinsurer is bound to pay only when a loss exceeds a certain amount.
[03:55.78]In essence,an excess-loss treaty is simply an insurance policy that has a large deductible taken out by the direct writer.
[04:05.34]The excess-loss treaty may be written to cover a specific risk or to cover many risks suffering loss from a single occurrence.
[04:14.59]Such a treaty might,for example,require the reinsurer to pay after the direct-writing company had sustained a loss of $10,000 on a specific piece of property,
[04:26.32]or it might require payment by the reinsurer if the direct writer suffered loss in excess of $50,000 from any one occurrence.
[04:35.70]There is,of course,a designated maximum limit of liability for the reinsurer.
[04:41.55]Insurers get that sinking feeling
[04:44.73]WHETHER insurers have hearts is debatable.
[04:48.03]But if they do,the date of August 24th 1992 is surely etched indelibly upon them.
[04:55.37]That was the day that Hurricane Andrew blew its way through Florida and Louisiana and into the record books,
[05:02.79]leaving insurers with a repair bill of over $15 billion.
[05:07.59]Reinsurers-sellers of insurance to insurers-ended up footing much of that bill.
[05:15.09]As a result,they swore that they would introduce discipline into an industry notorious for relying on gut instinct rather than actuarial tables.
[05:25.69]Notably,there would be a re-think of traditional underwriting methods.
[05:30.61]Two years on,however,little has changed.
[05:33.71]At first,the hurricane provoked a minirevolution.The price of catastrophe insurance soared:
[05:40.77]rates in the end-1992 renewal season were anywhere from 50% to 200% higher than those a year earlier.
[05:49.68]Retentions,which show the potential losses to which primary insurers opt to stay exposed rather than buying reinsurance,also rose sharply.
[06:00.72]Why?One reason was that the market's capacity to cover losses had shrunk.
[06:07.67]Hurricane Andrew followed several years of heavy losses.
[06:11.46]For several smaller reinsurers,it proved the last straw;they quit the industry.
[06:17.78]Even the world's two biggest reinsurance firms,Munich Re and Swiss Re,
[06:23.58]which had previously competed for market share,said that they would turn down business that did not meet tough underwriting criteria.
[06:31.92]At the same time,capacity at Lloyd's,London's troubled insurance market,
[06:37.53]was squeezed as "names"-the individuals whose capital supports the market-resigned in droves.
[06:45.29]Another reason that rates rose was that Hurricane Andrew had caused firms to revise their forecasts of future catastrophes.
[06:53.26]Munich Re,in particular,talked gloomily about global warming and the fear that it would lead to many more violent storms.
[07:02.09]To cover the increased probability of higher pay-outs,reinsurers began to charge more for their services.
[07:09.11]Recently,these trends have gone into reverse,for several reasons.
[07:13.84]First,1993 turned out to be a much better year for reinsurers than anyone had expected,with claims totalling a mere $12 billion.
[07:23.85](The bulk of the cost of that year's biggest disaster,the floods in America's Mid-west,fell on the government,not the insurance industry).
[07:32.47]As reinsurers turned in bumper results,talk of global warming faded.
[07:37.87]Second,reinsurance capacity began to rise again.
[07:41.82]Lloyd's of London was boosted by the prospect of an injection of capital from newly authorised corporate investors.
[07:49.00]And Bermuda,hitherto known only as a base for captive insurers(subsidiaries set up to allow industrial firms to insure themselves),suddenly became a force to be reckoned with.
[08:01.46]The creation of several new firms since November 1992 has boosted the capacity of the island's reinsurers from almost nothing to around $7 billion.
[08:13.69]New capacity has not stopped talk of an insurance crisis in Florida and,since January's earthquake in Los Angeles(the second-biggest insured loss ever),in California.
[08:25.21]Reinsurers have realised that potential catastrophic losses in those states are now so huge that it might never make sense to provide full coverage,
[08:34.69]reckons Peter Kellogg of A.M. Best,an American firm of insurance analysts.
[08:40.31]If thousands of homes are now to be left without cover,the government might have to step in.
[08:46.21]One way it could do so is by selling reinsurance,as proposed by the National Disaster Coalition,a lobby group. |