Actuarial Notes

IAA Risk Book: Reinsurance

By Michael Eves · International Actuarial Association · 2023 · CFE101-119-25

Study guide: Exam CFE-101

A chapter of the International Actuarial Association's Risk Book, developed and approved by the IAA Insurance Regulation Committee in May 2023 (version 2.0, written by Michael Eves). It outlines the key features of reinsurance arrangements, how they are priced and their potential impact on both the cedant and the reinsurer. The focus is on property and casualty reinsurance, with life and health reinsurance covered at a high level. It combines and replaces the earlier Non-proportional Reinsurance and Intra-Group Reinsurance Transactions chapters.

On the syllabus

  • Exam CFE-101 — CFE101-119-25: IAA Risk Book, Reinsurance; outcomes 3.2a, 3.2d.

Introducing the IAA Risk Book

1 Overview

  • 1.1 Background
  • 1.2 Aim of Chapter
  • 1.3 Relevance to Actuaries
  • 1.4 Executive Summary

2 Introduction

3 Categories of Reinsurance

  • 3.1 Facultative vs. Treaty
  • 3.2 Proportional vs. Non-proportional
  • 3.3 Short-Tail vs. Long-Tail Incurred Claims
  • 3.4 Direct vs. Brokered

4 Types of Proportional/Non-Proportional Reinsurance

  • 4.1 Proportional Reinsurance: Quota Share
  • 4.2 Proportional Reinsurance: Surplus
  • 4.3 Non-proportional Reinsurance: Excess of Loss

5 Life Reinsurance vs. Non-life Reinsurance

6 Pricing of Non-proportional Reinsurance

  • 6.1 Experience-Based Methods
  • 6.2 Exposure-Based Methods
  • 6.3 Reinstatements

7 Effects of Non-proportional Reinsurance

  • 7.1 Volatility Reduction
  • 7.2 Diversification Improvement
  • 7.3 Improvement of Risk/Return Relations
  • 7.4 Capacity Increase

8 Intra-group Reinsurance Transactions

  • 8.1 Structuring an IGR
  • 8.2 IGR Governance
  • 8.3 Negotiation
  • 8.4 Use of Special Purpose Vehicles
  • 8.5 Systemic Risk Considerations

9 Capital Effects of Reinsurance

  • 9.1 Substantial Decrease of Insurance Risk Capital
  • 9.2 Potential Increase of Insurance Risk Capital
  • 9.3 Solvency Ratio Improvement
  • 9.4 Rating Impact

10 Reinsurance and Regulation

  • 10.1 Business-to-Business Character of Transactions
  • 10.2 Powerful Risk Management Tool
  • 10.3 Importance of Full Recognition
  • 10.4 Cash Losses and Collateralization
  • 10.5 Systemic Risk Mitigation

11 Complementary Risk Mitigation Instruments

  • 11.1 Industry Loss Warranties
  • 11.2 Catastrophe Bonds
  • 11.3 Catastrophe Swaps
  • 11.4 Parametric Covers

Sources