Reasons for a Softening Insurance Market - Assignment Example

 Underwriting Question 1).The insurance cycle is expected to soften at the renewal pf the Margin Insurance Company’s reinsurance program. a).Discuss the reasons for a softening insurance market. b) You have been asked to comment on the following options: i) Obtain a reduction in the insurance premium or ii) Reduce the retention of Margin but without an increase in insurance cost or iii) Obtain an increase in reinsurance covers without an increase in insurance cost. Discuss the issue for each option. Answer a).A softening insurance market tends to occur during a period where there are relatively fewer severe losses or claims. During this time the reinsurance market usually brings in new underwriters attracted by the large premiums and profits earned by re-insurers during the preceding harder market. Ultimately however the infusion of new players in the market increases competition and therefore tends to drive down premiums. This works to the advantage of primary insurers who can reinsure part of their portfolio at a lower cost and/or obtain more reinsurance at the same cost. Soft market conditions are likely to develop during periods of relatively low claim severity and frequency following hard market periods with opposite claim circumstances and re-insurers can command higher premium rates. Answer b). During a soft market a primary insurer such as Margin has more negotiating power in dealing with re-insurers than in a hard market. They can take advantage of this power by !) negotiating a premium reduction. 2) reduce their retention without an increase in cost or 3) obtain an increase in reinsurance covers at the same cost. Of the 3 alternatives, unless Margin feels they are already very well protected from catastrophic loss, option 1 should be the least favored one. Option 2 which I assume means keeping the same type of reinsurance but reducing their retention , I submit would be preferable because it would protect them better in case claims are more frequent and/or severe than anticipated. Option 3 I assume means considering also different types of reinsurance providing greater protection for the same cost. If so I think Margin should investigate this option. If they don’t already have stop loss coverage for example perhaps this should be considered. As it protects their premium income if this can be obtained without additional cost. The bottom line for Margin is first of all for them to asses in a relatively worst case scenario the amount of claim costs it can safely bear without possibly going bankrupt, and then to consider the best type of reinsurance available for their portfolio, and cede beyond their retention to re-insurers at the lowest possible cost consistent with re-insurers’ good claim payment reputation and viability. Question 2). The Probe Insurance Company has identified annual personal accident and sickness as a class of business it wants to develop. Probe wants to offer up to 10m pounds for accidental death per person, loss of limbs or eyes or permanent total disablement. It also wants to provide weekly benefits for accident and sickness up to 104 weeks to a maximum of 500,000 pounds any one person. Probe does not want to retain in all more than 500,000 pounds per person. Discuss the methods of reinsurance that might be considered giving reasons for that selection. Answer. In this scenario we know only the maximum level of accidental death coverage Probe contemplates per person, not the average. Also, although the maximum accident and sickness weekly benefits are 500,000 pounds per person or just over 4,700 pounds per week for up to 2 years, we don’t know for example if this includes rehabilitation expenses designed shorten the disability period. Nevertheless, I think the potential for larger claims is far greater for the 10 million pound limit accidental death coverage than the accident and sickness. Therefore I suggest Probe retain the entire accident and sickness portfolio and cede the entire 10 million pound accidental death coverage to a reinsurance company in a non proportional treaty arrangement. In my opinion this would be better for Probe than for example ceding 250,000 pounds in each line of coverage, because it could avoid possible disputes re whether people qualify for coverage and allows Probe alone to set the conditions for policy holders to qualify for coverage under their accident and sickness portfolio. The re-insurer would handle entirely all claims under its; coverage and retain all relevant premium income except possibly pay commission to Probe for referral of the business. In effect Probe would be merely acting as a front for the accidental death business by providing their name. Also Probe would entirely handle all claims and retain all premiums relating to the accident and sickness business up to their desired 500.000 pound per person coverage limit which coincides with their preferred retention. Question 3.Following a very severe windstorm the losses sustained by the EKO Insurance Company in its’ property portfolio exceeded the limits of its’ catastrophic reinsurance protection/ Discuss the action the property underwriting manager should undertake. Answer. Unless the property underwriting manager can prove that some of the claimants violated a condition(s) of their policy thereby invalidating their coverage to the extent that claims are reduced to total within the catastrophic coverage limit, there is nothing he can do about these claims as he is legally bound to do so to the extent of the resources of EKO. He can only protect EKO from a recurrence of a similar situation in the future. He can limit the number and size of risks accepted by EKO in a particular geographical area especially prone to windstorms such as hurricanes, for example in the Caribbean. If feasible he could consider excluding windstorm risk entirely for particular areas especially prone to windstorms. However the risks of natural disasters such as windstorm are difficult to predict, but he could use a tool such as catastrophic modeling to assess the likelihood of such an event, for example one in 10 years or one in 199 years. To arrive at an assessment underwrites consider not only past experience over a long period of time but also the possible influence of current phenomenon such as global warming that might increase the historical frequency. If the catastrophic limit is considered inadequate thought should be given to the formation and participation in insurance pools with other insurers, re-insurers and possibly government with each participant contributing premium and receiving claim payments proportional to their level of participation. All these options assumes that the underwriter feels that it is still possible to underwrite the risk at an acceptable cost and level of risk. Question 4(a). Discuss the claim information that has to be provided to a re-insurer for the placement of an excess of loss treaty. (b) Why is it important that the claim information is accurate? Answer (a) For the placement of an excess of loss treaty a potential re-insurer usually would require the primary insurer’s loss experience for the particular class of business being ceded so that it can be compared with the norm for that class of business. In other words, of it is lower or higher than the industry average. Also, over the last few years are there any trends, up or down, in loss experience? The re-insurer is especially interested in individual large losses which could approach its threshold .The re-insurer also needs to be made aware of any change in the primary insurer’s claim reserve and settlement philosophies. For high risk business re-insurers may require all loss information for a specified period, not merely for large losses which could potentially approach the proposed retention level. (b) It is important that the provided claims information be accurate as it largely determines whether the business will be accepted by the re-insurer and if so at what premium level.. Also, like the insurance contract between an insurer and an insured, the one between a primary insurer and re-insurer is largely based on good faith and honesty since it is not feasible to verify all the information provided. The continued provision of accurate and full information to the best of its’ ability by the primary insurer to the re-insurer can build a positive trusting business relationship. . Read More