Rehoboth Business Center

Archive for the ‘Insurance’ Category

As phrased by Borch (1960), a company makes arrangements for reinsurance when it seeks to reduce the probability of suffering losses which may jeopardize the position of the company. Among the reasons to ponder reinsurance the insurer can think about the following.

• The appearance of excessively large claim; here we think about claims resulting from severe accidents as with nuclear power stations or cases of serious medical maltreatment. In other instances an insurer might be confronted with large claims coming from a policy involving very valuable items such as air carriers, oil tankers, dams and large building complexes.
• An unusually large number of claim or clustering of claims, whether large or not. Extensive forest fires may temporarily lead to a very large number of more or less large claims. Hurricanes, earthquakes and floods cent cause similar explosions of the number of claims.
• Unexpected changes in premium collection as in the case of a sudden inflation or unforeseen increase in handling costs. Under these circumstances the company actually does not quite receive the premium income it had expected at the beginning of the book year.
• There are legal restrictions forcing the company to have reserves to cover a certain part of future claims. For a smaller company these restrictions would cause a noncompetitive premium. Taking reinsurance is a comfortable way of solving that problem.
• If a company can take reinsurance, it can also offer more services to its clients. Reinsurance can therefore be considered to increase the capacity of the company.

There exists a variety of reinsurance forms. What they all have in common is the desire to diminish the impact of the large claims. In what follows we provide the mathematical formulation of most. of the currently employed reinsurance treaties.