“Our promise and bond is your security”

“Treaty and facultative underwriting – a reinsurer’s perspective” Presented by: Tatenda Katoma “Our promise and bond is your security”

Agenda Types of Reinsurance Treaty – Main characteristics Facultative – Main characteristics Facultative – Practical application Reinsurer’s interests Cedant’s interests Potential areas of conflict General factors affecting reinsurers

Types of Reinsurance Reinsurance Plans Proportional Facultative Reinsurance Treaty (Obligatory) Reinsurance Quota share Surplus Fac/Oblig Non-proportional Per risk Per risk XL Per risk aggregate XL Per occurrence Aggregate excess of loss

Treaty – Main characteristics Yearly agreement i.e. annually renewable contract Automatic cover. Bulky cessions i.e. no individual underwriting of risks by reinsurer. Well defined underwriting standards and limits (to be followed by cedant) Cedant submits treaty returns on a regular basis to the reinsurer(s)

Facultative – Main characteristics Oldest method of reinsurance. Each risk is offered individually (by the cedant) to the reinsurer. All material facts about the risk are disclosed. The reinsurer has an option of either accepting or declining.

Facultative – Practical application to reinsure special risks which are outside the scope of treaties; to reinsure amounts which are in excess of treaty limits; to restrict the liabilities of the ceding company and that of reinsurers where the physical hazards of a risk are abnormally high; reciprocity of business of similar quality; to seek expertise and experience of reinsurers on risks of a special nature.

Reinsurer’s interests Bedrock principle of reinsurance “Reinsurers follow-the-fortunes (or follow-the-settlements) of Cedants.” Thus, reinsurers are interested in: profitable underwriting (of the cedant); in establishing lasting and mutually beneficial relationships with Cedants (as they avail technical expertise and training of Cedants’ staff);

Cedant’s interests Some of the genuine reasons why Cedants take out reinsurance are: To spread and diversify risk; To access additional underwriting capacity; To smooth claims experience; To tap on wide experience and technical expertise of the reinsurer.

Potential areas of conflict Cedants may participate on certain accounts/risks for market positioning reasons – in turn, they may fail to be objective in underwriting the account. There may be a misconception that a reinsurance programme is only valuable if there are reinsurance recoveries – resulting in anti-selection against reinsurer. Non-disclosure of material facts about risk(s).

General factors affecting reinsurers Capital levels and retentions Changing regulatory landscape Adverse selection and peak risk cession Liquidity and cash problems Claims inflation Claims process Underwriting challenges

Capital levels and retentions Insurer demand for reinsurance slows as Capital Increases

Changing Regulatory Landscape Upward review of minimum capital requirement i.e. stringent solvency requirement. Reinsurance – an alternative source of cost-effective capital.

Adverse selection Cedants no longer ceding portfolios Reinsurers only exposed to peak risks without necessary pooling of risks and premiums.

Liquidity and cash problems General cash shortages Delay in premium remittance – which undermines investment returns for the reinsurer

Claims Inflation Current cash shortages have led to an artificial claims inflation of 40%, which is being applied on the hard cash cost of goods. 40%

Claims process Cedant expectations - timely payment Reinsurer’s role - technical guidance and payment (no re-underwriting during claim negotiation) risk improvement areas for the future Problems faced : lack of trust – cedant/broker overprotects client in order to retain business. No cooperation and overstepping of mandate at claim negotiation.

Underwriting challenges Underwriters should work as specialists for a particular line or lines of insurance. There is limited specialisation. Despite the growing buzz on big data, there is still restricted use of data analytics in the industry’s underwriting process. Data/statistics are not readily available – industry needs to improve IT administration systems. A disconnect between pricing approach and (generous) policy wordings.

“Our promise and bond is your security”

THANK YOU Email: katomat@grandre.co.zw