The Cost of Mixing Reinsurance

Excess and surplus lines underwriters, and others, rely heavily on facultative reinsurance support as an important part of their underwriting function. Individual risks are often subject to multiple reinsurance transactions as a result of the underwriting process. The net retained by the underwriters for the company’s account is then subject to the overall company reinsurance treaty. As a result, the final company net position has been layered in a complicated fashion. It is management’s task to provide guidelines for the proper use of facultative proportional and excess reinsurance that achieves corporate risk and profitability objectives under such conditions. This paper investigates the impact on profitability of a common reinsurance mixing situation. The impact on the stability function of excess reinsurance is quantified. General rules to guide practical use and evaluation of mixed situations are developed. These results are equally applicable to property as well as casualty risks. The implications are valid for facultative reinsurance underwriters, and others that make heavy use of facultative proportional reinsurance arrangements. Reinsurance Research - Outward Program Design