12

Outline

Underwriting the Reinsured

THE ESSENTIAL RISK: THE REINSURED                             501
   The Banking Concept
   The Living Business Enterprise
       The Treaty
       The Reinsured’s Potential Inability to Perform
       Possible Changes in the Business Being Reinsured
  Continuity

MEASURING THE REINSURED’S FISCAL HEALTH            510
   Sources of Information
       Reinsured
       NAIC
       Public Records
       Private Rating Agencies
       Reinsurer

   Interpreting the Signals
       Effects of the Reinsured’s Insolvency
       Creditworthy Characteristics from Surplus
          Adequacy of Surplus
          Adjustments to Surplus
          Projection of Surplus
       Other Elements Affecting Fiscal Health
          Methods of Computing IBNR
          Underwriting Leverage
          Rate Level
          Diversification
          Depth of Staff
          Credibility of Results
          Policy Terms
          Effects of Previous and Existing Reinsurance

IS THE PROPOSED REINSURANCE PROGRAM VALID?    538

THE VALUE OF RESPONSIBLE ACTIONS                            541

SUMMARY                                                                                542

12

Underwriting the Reinsured

By Lewis H. Paul *

     Reinsurance underwriting is more art than science. The development of computer models has elevated this art form, perhaps to its highest level yet. However, reinsurance is still a business of developing personal relationships: deciding whom to trust and do business with is beyond computer modeling. Whatever reinsurance program is designed, its fundamental basis is professional and personal integrity or else the program is doomed from the start. The personal relationship, moreover, creates the proper environment for determining the appropriate price.

     There are, in general, three distinct occasions for the reinsurer to initially underwrite the reinsured. The first occasion is the negotiating stage, during the pre-binding period, when the reinsurer is considering entering into a new reinsurance relationship with a prospective reinsured. Once the relationship is established, the underwriting process is a continuous activity. Second, and later in the coverage period, the reinsurer is called upon by its reinsured to structure newly desired coverage or expand its dimensions. The third occasion is when the reinsurance relationship is terminated. There, the underwriting process during the run-off period takes on a different dimension, but nevertheless constitutes an important responsibility.

     Before discussing how the reinsurer goes about this underwriting activity, several considerations should be put into perspective.

* CPCU, Senior Vice President, E. W. BLANCH CO. REINSURANCE SERVICES, 3500 West 80th Street, Minneapolis MN 55431. An autobiography follows the chapter. (Editor's note. The author has wisely chosen to retain much of the 1980 chapter, as prepared by then President of Skandia America Reinsurance Company of New York, Dr. Laszlo K. Gonye, ably assisted by F. Eugene Duffee, James F. Dowd, John B. Laadt, and Robert H. Alexander. The revision has focused on simplifying, clarifying, and updating the material in keeping with current reinsurance needs and practices.)

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