ACTL10001 Chap.11 General Insurance and Reinsurance
General Insurance and Reinsurance
General insurance separates how often claims occur from how large they are, and recognises that settlement timing can be short or long. Long tail claims create greater development, inflation and legal uncertainty, while short tail claims emphasise near term liquidity. Reinsurance transfers selected layers or proportions of risk to another insurer.
A positive reinsurance margin does not make cover irrational because reduced volatility, capital protection and underwriting capacity have value. The chapter models excess layers, compares claim tails and links a proposed control to the diagnosed frequency, severity or dependence problem.
What this chapter covers
- 01
Claim frequency
- 02
Claim severity
- 03
Short tail claims
- 04
Long tail claims
- 05
Reinsurance purpose
- 06
Retention layers
- 07
Excess recoveries
- 08
Capital and volatility
Worked example · free
An excess claim layer
- 1The insurer pays the retention of $500,000.
- 1The reinsurer pays the excess 860,000 - 500,000 = $360,000.
- 1The two shares sum to the total claim of $860,000.
Key terms
- Claim Frequency
- The number of claims relative to an appropriate exposure measure.
- Claim Severity
- The size of a claim, often studied through its average and tail distribution.
- Short Tail
- A claim class typically reported and settled over a relatively short horizon.
- Long Tail
- A claim class whose final settlement and cost may emerge over many years.
- Reinsurance
- Insurance purchased by an insurer to transfer specified parts of its portfolio risk.
- Retention
- The loss amount or layer retained by the insurer before reinsurance responds.
General Insurance and Reinsurance FAQ
Why buy reinsurance with a positive margin?
The insurer may value reduced severe loss volatility, capital relief, solvency protection and underwriting capacity in addition to expected claim recovery from the purchased contract.
What is the difference between frequency and severity?
Frequency describes how often claims occur, while severity describes their size. The same total loss can arise from very different combinations across insured portfolio exposures.
Why do long tail claims need different analysis?
Their final cost develops over a longer horizon, increasing uncertainty from inflation, legal outcomes, reporting delays and investment or discount assumptions used in claims reserving.
Does reinsurance change the policyholder claim automatically?
No. The direct insurer remains responsible under the original policy and then seeks recovery from the reinsurer according to the separate reinsurance contract and its terms.
Why might an insurer buy reinsurance that costs more than expected recoveries?
The cover can reduce volatility, protect capital and limit exposure to severe or accumulated losses. The decision compares risk protection, price, counterparty strength and contract fit rather than expected claim reimbursement alone.
How should I choose between a frequency response and a severity response?
First normalise claim count for exposure and inspect the claim-size distribution. Prevention, underwriting or deductibles may target repeated smaller events, while limits, claims controls or an excess reinsurance layer may target large severities. If losses are dependent in catastrophes, also examine aggregate accumulation rather than treating claims as independent.
Check whether the apparent movement reflects paid, incurred or estimated ultimate claims before selecting the response. Match exposure definitions and observation periods before comparing reported portfolio trends across underwriting years and coverage groups.
Exam move
Diagnose portfolio movement by separating exposure, frequency and severity before choosing a response. Practise excess layer calculations below retention, inside the layer and above any stated limit. Compare short and long tail lines through settlement, reserve uncertainty, liquidity and asset implications. For judgement questions, explain why expected cost is not the only objective and name counterparty or contract risk.
Make every recommendation specific to the loss component it targets. Start a portfolio analysis with exposure units, claim counts, average severity and total cost in separate columns. Calculate frequency per exposure before interpreting a rising count, and calculate severity per claim before attributing higher cost to more events.
Add scenarios where only exposure changes, only claim size changes or a few extreme losses distort the average. For reinsurance, sketch the claim amount on a horizontal axis and mark the retention and any upper limit. Evaluate insurer and reinsurer shares below, at and above each boundary, then confirm that the shares sum to the original claim.
Compare proportional and excess structures through the risk each transfers rather than by name alone. Classify settlement tails from claim development and payment timing, not from policy duration. Link a long tail to reserve uncertainty, inflation sensitivity and asset-liability considerations while retaining the need for liquidity.
Practise catastrophe scenarios where claims are dependent, because many simultaneous losses do not diversify like independent events. When proposing a response, connect it explicitly to frequency, ordinary severity or the extreme tail. Include the cost of protection, counterparty default, exclusions and basis risk in the judgement. Conclude with the insurer's retained position after reinsurance.
Risk transfer changes the distribution of outcomes but does not remove underwriting, claims management or every adverse incentive.
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