In response to yesterday’s post, Leena C. asked two queries:
1) How Reinsurer manages such accumulation through a clause?
2) What Underwriting controls are required to manage such accumulation?
I would like to start today’s blog with two disclaimers:
1) Yesterday’s example was impact on National Re-this was specifically taken since National Re usually participates on most treaties in the market and takes substantial share. Hence, the impact on National Re will be much more than a reinsurer who is selective in participation. However, I have no idea how National Re manages its accumulation. Hence, today’s blog is generic and is about any reinsurer and not specific to National Re.
2) Word “Accumulation” is usually related to Event Losses. Yesterday blog was with respect to a risk loss. Hence, this blog is not with respect to accumulation management, but management of specific scenario mentioned in yesterday’s example.
Normally, a clause is put by the reinsurer, which restricts the treaty capacity in case of co-insurance. For example, it may say:
If co-insurance share >= 50%; then 100% treaty capacity can be used.
If c0-insurance share between 20% and 50%; then 75% treaty capacity can be used.
If co-insurance share < = 20%, then 50% treaty capacity can be used.
This solves the issue to small extent. As we can appreciate in yesterday’s example, it reduces the reinsurer share of loss to some extent, but the problem will still continue.
What is the underwriting control a reinsurer puts in place?
When a cedant says their retention is USD 5 m, it means that the worst risk loss they are ready to suffer to their net account is USD 5 m. Similarly, when a reinsurer says, it is giving 30% capacity to a 10-line surplus treaty, it means they are ready to suffer a worst risk loss of USD 15 m. However, when there are 10 co-insurers each with 10% co-insurance share, the worst risk loss they suffer will be much higher.
As an underwriting control, when a reinsurer knows that co-insurance is highly prevalent, then they distribute their capacity amongst the cedants rather than using their full capacity. Easy to implement for reinsurers who participate selectively but very difficult for a National Re.
Some of you may say National Re can buy an excess of loss protection. How much XOL will they buy? Yesterday’s example was 10 co-insurers with 10% share each. If it was 20 co-insurers with 5% share each, they need to buyer higher XOL limit. If it was on PML basis and they need to protect for PML bust, they need to buy much higher limit. XOL comes at a huge cost. If the limits are so high, it may become economically unviable.
Reinsurance can never be a solution for bad underwriting and underpricing.
