Reinsurance Agreement Research Articles

Quantum Computing in Insurance Capital Modelling under Reinsurance Contracts

In this study, we design an algorithm to work on gate-based quantum computers. Based on the algorithm, we construct a quantum circuit that represents the surplus process of a cedant under a reinsurance agreement. This circuit takes into account a variety of factors: initial reserve, insurance premium, reinsurance premium, and specific amounts related to claims, retention, and deductibles for two different non-proportional reinsurance contracts. Additionally, we demonstrate how to perturb the actuarial stochastic process using Hadamard gates to account for unpredictable damage. We conclude by presenting graphs and numerical results to validate our capital modelling approach.

Impact of Reinsurance Agreements on Assets and Liabilities Management of Property and Casualty Insurance Companies Applied in the Egyptian Insurance Market

Impact of Reinsurance Agreements on Assets and Liabilities Management of Property and Casualty Insurance Companies Applied in the Egyptian Insurance Market

Reinsurance Intra-Group Agreements – The Key Role of RE-EVA in Supporting the Arm’s Length Principle

In an economic context in which risk management plays an important role for the economic players, it is increasingly common to come across reinsurance transactions. In this context, multinationals often make use of reinsurance agreements, generating significant transnational flows with the related consequences also in terms of transfer prices. Despite the efforts made by the OECD with the publication of the new chapter X of the OECD Transfer Pricing Guidelines and with the clarifications provided on risk analysis, the common transfer pricing rules are not immediately applicable to reinsurance operations, also due to the complexity of the agreements and the difficulty of applying the existing TP methods to them. Therefore, this article, having analysed the main transfer pricing risks associated with intercompany reinsurance transactions, intends to provide possible new tools to verify the compliance with the arm’s length principle of reinsurance agreements, such as the combined ratio, the capital release, actuarial analysis and the RE-EVA.

The Implication of Copula-Based Models for Crop Insurance and Reinsurance Under Systemic Risk

The purpose of this paper is to estimate county-level aggregate crop insurance and reinsurance losses under systematic risk. The effect of dependence risk on losses assessment and insurance pricing is quantified by establishing joint distribution functions between county-level yields using different forms of multivariate copulas. The research also stresses the importance of selecting the appropriate copula form for estimating losses. This article highlights several significant findings. The estimated aggregate losses for related counties are not significantly different between the model assuming dependence (copula-based) and the model assuming independence (individual) that adheres to the equivalence principle. On the other hand, the copula-based model has a discernible effect on the estimated Value-at-Risk and Expected Shortfall for related counties. Additionally, for the different layers of the Standard Reinsurance Agreement policy, the copula-based model can measure the aggregate losses more accurately than the individual models. Furthermore, when there is obvious tail dependence in the related counties’ yields, the vine copula function form, which provides a more flexible description of the dependence, is more suitable for quantifying tail risk. As a result, insurers and governments should conduct a more comprehensive risk assessment of yield dependence when rate-making and allocating subsidies.

Hedging the Price Risk Inherent in Revenue Protection Insurance

AbstractCrop revenue insurance is unique, because it involves a guarantee subsuming yield risk and highly systematic price risk. This study examines whether crop insurers could use options instead of, or in addition to, assigning policies to the Commercial Funds of the USDA Federal Crop Insurance Corporation (FCIC) as per the Standard Reinsurance Agreement (SRA) to hedge the price risk of revenue insurance policies. The behavioral model examines the optimal hedge ratio for a crop insurer with a book of business consisting of corn Revenue Protection (RP) policies. Results show that a mix of put and call options can hedge the price risk of the RP policies. The higher optimal hedge ratios of call options as compared to put options imply that the risk of increased liability due to upside price risk can be hedged using options better than downside price risk. This study also analyzed the combination of options with the SRA at 35, 50, and 75% retention levels. The zero optimal hedge ratios at each retention level and the negative correlation between RP indemnities and the option returns when the crop insurer mixed options and SRA suggest that the purchasing of options provides no additional risk protection to crop insurers beyond what is provided by the SRA despite retention limits.

Third party rights to reinsurance agreement under Brazilian law: a study on facultative civil liability insurance

Despite the impossibility to, under Brazilian law, as a rule, an insured or aggrieved third party seek payment of insurance indemnity directly from a reinsurer, it is recurrent the inclusion of reinsurers as defendants in lawsuits, especially in cases involving the purchase of facultative civil liability insurance. As a result of legislative, jurisprudential, bibliographical and documentary research, this study aims to shed light on the relationships and obligations established by reinsurance agreements and reject this unlawful practice at once. This is done through an initial dive into the insurance relationship and the facultative civil liability insurance and through the review of the particularities of reinsurance and the features that differ it from insurance, to, ultimately, reinforce the initial statement that served as a premise for this work.

Time dependent stop-loss reinsurance and exposure curves

Stop-loss contracts are the most commonly used reinsurance agreements in insurance whose important factors are the retention and the maximum (cap) values attained on the random loss, which may occur within the policy period. Therefore, determining and forecasting the loss amounts is an important issue for both the insurer and the reinsurer. Along with many approaches in actuarial literature, we propose a geometric Brownian motion (BM) with the time-varying parameters to capture the time-dependent loss amounts. We implement the time-influence on stop-loss contract in the frame of the stochastic model and find the analytical derivations of costs associated with reinsurance contract for reinsurer and insurer with constraints on time, loss amount, retention, and both retention and cap levels. Additionally, the analytical forms of exposure curves are depicted to determine the premium share between reinsurer and insurer under time, loss, retention, and both retention and cap constraints. An application of the proposed methodology on real-life data and the calibration of time-varying parameters using dynamic maximum likelihood estimator and simulations on the proposed model are performed. Finally, we forecast the claim amounts, expected costs, and exposure curves on time-varying parameters using the cubic spline extrapolation and the dynamic ARIMA with trend search. It is shown that the time-varying approach using the stochastic model copes with the behavior of the claims and assures fair share between insurer and reinsurer.

The contribution of shadow insurance to systemic risk

Shadow insurance is a regulatory loophole exploited by certain insurance groups to increase risk exposure, potentially destabilising the financial system. In this paper, we evaluate the contribution of shadow insurance to systemic risk of the global financial sector using a sample of 215 international insurance entities covering the 2004–2017 period. We detect shadow insurance by examining every reinsurance agreement on the Schedule S filings. Using both ΔCoVaR and SRISK measures, we find that the practice of shadow insurance is a significant driver of global systemic risk.

Ukrainian insurance market: current state and development prospects

The paper is devoted to the investigation of the current state and trends of the insurance market in Ukraine. A number of indicators characterizing the state of insurance market development, such as: the number of insurance companies engaged in risky types of insurance and life insurance; volume and dynamics of gross insurance bonuses and insurance payments; dynamics of the number of concluded agreements on voluntary and compulsory types of insurance, as well as reinsurance agreements; volume and dynamics of assets and insurance reserves of domestic insurance companies are analyzed in this scientific paper. Comparative analysis of the above mentioned indicators with similar indicators of foreign countries is carried out. It is defined that the insurance market of Ukraine lags far behind the countries of Europe, the USA, China, Japan and other developed countries. The reason for such low development is the difficult economic situation in the country caused by such factors as the change of power in 2015, the occupation of part of the territory by the Russian Federation, which shattered the previously unstable economy. Although the economic situation in the country has stabilized in recent years, this is not enough for the insurance market to reach the level of developed economies. The investigation results are presented in the form of tables and graphical interpretations. The factors of positive and negative influence on the development of domestic insurance market are determined and characterized. The main factor influencing the insurance market and ensuring its stability is the control of measures increasing the level of the population insurance culture and the reliability of insurance companies. Such measures will increase the demand for insurance services, insurers will be interested in doing their best and these factors will result in financial market stabilization. This effect will be achieved if the state and insurance companies act in coordinated manner, i.e. if the state provides the insurance market with regulatory framework with unobtrusive supervision, and insurers perform their work honestly and conscientiously. A number of recommendations for the development of domestic insurance companies and the market in general are developed. The main measures are to attract capital not only from European countries, making the insurance market more attractive, but to develop the health insurance, as medicine is quite expensive and the income is low, as well as to introduce the new insurance products due to the development of all industries.

The Contribution of Shadow Insurance to Systemic Risk

Shadow insurance is a regulatory loophole exploited by certain insurance groups to increase risk exposure, potentially destabilizing the financial system. In this paper, we evaluate the contribution of shadow insurance to systemic risk of the global financial sector using a sample of 215 international insurance entities covering the 2004-2017 period. We detect shadow insurance by examining every reinsurance agreement on the Schedule S filings. Using both DCoVaR and SRISK measures, we find that the practice of shadow insurance is a significant driver of global systemic risk.

Value-at-Risk and Models of Dependence in the U.S. Federal Crop Insurance Program

The federal crop insurance program covered more than 110 billion dollars in total liability in 2018. The program consists of policies across a wide range of crops, plans, and locations. Weather and other latent variables induce dependence among components of the portfolio. Computing value-at-risk (VaR) is important because the Standard Reinsurance Agreement (SRA) allows for a portion of the risk to be transferred to the federal government. Further, the international reinsurance industry is extensively involved in risk sharing arrangements with U.S. crop insurers. VaR is an important measure of the risk of an insurance portfolio. In this context, VaR is typically expressed in terms of probable maximum loss (PML) or as a return period, whereby a loss of certain magnitude is expected to return within a given period of time. Determining bounds on VaR is complicated by the non-homogeneous nature of crop insurance portfolios. We consider several different scenarios for the marginal distributions of losses and provide sharp bounds on VaR using a rearrangement algorithm. Our results are related to alternative measures of portfolio risks based on multivariate distribution functions and alternative copula specifications.

Optimal quota-share reinsurance based on the mutual benefit of insurer and reinsurer

This paper investigates the optimal quota-share reinsurance strategies that can bring mutual benefit to both an insurer and a reinsurer. We consider five different optimality criteria that reflect the interest of both parties. The mutual beneficiary is also reflected in utility improvement constraints, which guarantee that both the insurer and the reinsurer will end up with higher expected utility of wealth with reinsurance agreements. Under each optimality criterion, explicit expressions of optimal quota-share retention and the corresponding objective function are obtained. Results indicate that the reinsurer’s safety loading plays a key role in determining the optimal retained proportion. In the numerical example, we demonstrate the expected utility increment after underwriting optimal constrained quota-share reinsurance that minimizes the total VaR/TVaR of the two parties. Comparing with the optimal strategies without utility constraint, the total expected utility will increase significantly after entering into an optimal quota-share reinsurance contact with utility improvement constraints.

Climate and agricultural risk: measuring the effect of ENSO on U.S. crop insurance

AbstractPredictive models of climatic phenomena can aid in insurance program design and decision making. Extreme weather outcomes have been linked to the El Niño Southern Oscillation (ENSO), which globally impacts agricultural production. This study demonstrates that extreme ENSO events alter cotton yield distributions in the Southeastern United States. These impacts translate into economically meaningful effects on crop insurance premium rates. Commercial insurers can use publicly available information to determine if government‐set premium rates are mispriced, and in turn extract economic rents via the federally mandated Standard Reinsurance Agreement. By ceding underpriced policies in El Niño and La Niña years, we find that private insurance companies can reduce paid indemnities by 10–15% on average.

A decision framework for optimal crop reinsurance selection

Purpose – In the USA, private insurance companies serve as an integral part of the delivery and risk sharing of the federal crop insurance program. Governed by the Standard Reinsurance Agreement (SRA), private crop insurance companies must designate an eligible crop insurance contract to the assigned risk, developmental, or commercial funds. While the SRA restricts the private sector delivery system in a number of ways, the assignment of contracts to crop insurance funds, however, is left solely to the discretion of individual crop insurance companies. Thus, as to the companies' profitability viewpoint, the optimal selection of the crop insurance funds is the most important task. Therefore, the purpose of this paper is to provide a decision framework for crop insurance companies to make optimal decisions regarding the purchases of crop reinsurance. This information and framework may also be useful for crop insurance firms in China when considering crop reinsurance decisions.Design/methodology/approach – T...

METODE REASURANSI QUOTA SHARE TREATY DITINJAU DARI HUKUM PERJANJIAN

AbstrakThis essay discusses the methods of quota share reinsurance treaty review ofthe applicable treaty law in indonesia. Writing this essay aims to find outlegal protection for client (Insured) when an insurance company (insurer) ismaking a reinsurance agreement with the company by using the methods ofquota share treaty, subject to sanctions such as Feezing efforts by theregulator and the responsibility for the insurance company (insurer) inviolation of the clause "claim cooperation clause" which are listed in thereinsurance agreement with the method of quota share treaty in handlingclaims. This research is using the literature research and field research.Results of this study suggest that the government create more regulations tohandling claims and required a special institution that can protect the rightsof customers in the consumer services in the areas of insurance

Actuarial Applications of a Hierarchical Insurance Claims Model

AbstractThis paper demonstrates actuarial applications of modern statistical methods that are applied to detailed, micro-level automobile insurance records. We consider 1993-2001 data consisting of policy and claims files from a major Singaporean insurance company. A hierarchical statistical model, developed in prior work (Frees and Valdez (2008)), is fit using the micro-level data. This model allows us to study the accident frequency, loss type and severity jointly and to incorporate individual characteristics such as age, gender and driving history that explain heterogeneity among policyholders.Based on this hierarchical model, one can analyze the risk profile of either a single policy (micro-level) or a portfolio of business (macro-level). This paper investigates three types of actuarial applications. First, we demonstrate the calculation of the predictive mean of losses for individual risk rating. This allows the actuary to differentiate prices based on policyholder characteristics. The nonlinear effects of coverage modifications such as deductibles, policy limits and coinsurance are quantified. Moreover, our flexible structure allows us to “unbundle” contracts and price more primitive elements of the contract, such as coverage type. The second application concerns the predictive distribution of a portfolio of business. We demonstrate the calculation of various risk measures, including value at risk and conditional tail expectation, that are useful in determining economic capital for insurance companies. Third, we examine the effects of several reinsurance treaties. Specifically, we show the predictive loss distributions for both the insurer and reinsurer under quota share and excess-of-loss reinsurance agreements. In addition, we present an example of portfolio reinsurance, in which the combined effect of reinsurance agreements on the risk characteristics of ceding and reinsuring company are described.

The Rome I Regulation and Reinsurance

This paper analyses the likely effect of the Rome I Regulation on reinsurance contracts, and concludes for a variety of reasons - including the wordings used in reinsurance agreements, the use of arbitration and the relationship between the underlying insurance and the reinsurance - that the change from the Rome Convention to the Rome Regulation is likely to have at best a marginal impact on the process of ascertaining the applicable law

Arbitration in the Light of the Opening of Brazilian Reinsurance Market

ABSTRACT: The development of the international insurance industry along with the growth of the Brazilian insurance market forced the modernization of the insurance legal regime in Brazil with the Law 126 of january 15, 2007. The possibility of using arbitration as a mechanism for resolving disputes under reinsurance agreements reveals that the new Act offers an important tool for the efficiency of the system, and intends to place the country in equal footing with other jurisdictions in the effort to encourage and promote its reinsurance market. However, the use of arbitration, according with the Act, shall conform to specific legislation, which may lead to some initial speculation as to the extent and scope of the parties freedom of contract. This article aims at providing a preliminary discussion of the use of arbitration under the new reinsurance legal regime in the country.

Private Crop Insurers and the Reinsurance Fund Allocation Decision

This research investigates the strategic behavior of private crop insurance firms reinsured by the USDA through the Standard Reinsurance Agreement. This arrangement allows the private firm to strategically allocate individual policies into different risk‐sharing arrangements. Thus, firm earnings are conditioned upon accurately forecasting policy loss experience. Our analysis begins with models investigating the characteristics explaining the placement of policies into the assigned risk fund. Then a simulation model of the SRA is used to compare the post‐SRA returns of actual firm allocations to two alternative allocation strategies based on a aggregate models and a policy‐level econometric forecasting model.

Truncated Stop Loss as Optimal Reinsurance Agreement in One-period Models

We consider several one-period reinsurance models and derive a rule which minimizes the ruin probability of the cedent for a fixed reinsurance risk premium. The premium is calculated according to the economic principle, generalized zero-utility principle, Esscher principle or mean-variance principles. It turns out that a truncated stop loss is an optimal treaty in the class ofallreinsurance contracts. The result is also valid for models not involving ruin probability. An example is the Arrow model with the Kahneman-Tversky value function.