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Insurer Ownership, Financial and operational structure (Insurer Capital…
Insurer Ownership, Financial and operational structure
Costs of insurer Capital
- opportunity cost- owners cannot invest elsewhere.
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Insurance
- The pooling of fortuitous losses by transfer of such risk to insurer, who agree to indemnify insured for such losses, to provide other pecuniary benefits on their occurrence, or to render service connected with the risk
Insured ( the person, group or property for which can insurance policy is issued)
Characteristic
- Pooling- grouping together
- Fortuitous - happening by accident
- Pecuniary- financial benefits
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Insurer Capital
The market value of assets
- equal to present value of the payments the insurer has promised to make in the future for policies already sold
The market value of liabilities
- difference between the market value of assets and the market value of liabilities
Economic Capital
- reflect market value of the insurer's stocks, bonds, real estate, cash and the like
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Reinsurance
Primary roles
- Reduce variance in claim costs by:
- diversification - insurers can reduce underwriting risk
- Reducing exposure to very high claim
- Reduce amount of capital needed to achieve a given probability of insolvency
Type of Reinsurance
Excess (Non - proportion
- The reinsurer pays part of the ceding insurer's claims only if a particular threshold is reached
- Threshold Based on:
- claims costs from a single policy,known as per risk excess reinsurance
- Catastrophe reinsurance that the insurer start paying claim cots on a pool of policies if total claims costs arising from a single event exceed some dollar amount
*Insurer has to pay claim cots if total claim costs on pool of policies exceed the threshold during specified time period
Treaty
- Nature of the transaction that covers multiple policies written by ceding insurer
- E.G: at the beginning of the year a workers compensation insurer may engage in reinsurance treaty whereby the reinsurer agrees to accept without the right to refuse a portion of each policy that the primary insurer wishes to cede during the year
Proportional (pro-rate reinsurance)
- The ceding (buyer) company pays a proportion of its premium on a pool of policies to an reinsurer
-In exchange the reinsurer pays the same proportion of the claim costs on those policies
- The contract requires reinsurer to pay a commission to the ceding insurer (buyer) as compensation for the buyer distribution underwriting and loss adjustment expenses
- Insurer pay commission to buyer as compensation
Facultative
- Nature of transaction that the insurer evaluate each risk(policy) that the primary insurer would like to cede and decides weather to accept it on case by case basis