Insurance Theory and Practice Essay Example | Topics and Well Written Essays - 3500 words

Insurance Theory and Practice - Essay Example Renewal rates were lower in 2006 than 2005 as the industry responds to greater competition from a number of sources. In addition, rates have stabilised because the industry's capital base has been restored thanks to internal profits after a low level of catastrophes in 2006 and 2007. Catastrophe bonds: A catastrophe bond issued through special purpose reinsurance vehicle (SPRV) is a specialized security that increases insurers' ability to provide insurance protection by transferring the risk to bond investors. Industry loss warranty contract (ILW): Unlike traditional reinsurance, where the reinsurer pays a portion of the primary company's losses according to an agreed upon formula, the ILW is triggered by an agreed-upon industry loss. Side car: Simple agreements that allow a reinsurer to transfer to another reinsurer or group of investors, such as hedge funds, a limited and specific risk, such as the risk of an earthquake or hurricane in a given geographic area over a specific period of time. Federal and State Catastrophe Funds: Many are calling for government-backed programs to assume some of the financial risk associated with natural disasters. 1.4 Post-September 11 and Natural Catastrophes The terrorist attacks on the World Trade Center accelerated premium rate higher and insurers started looking accumulation-of-loss viewpoint in addition to traditional considerations, particularly in areas that may be terrorism targets. Hurricanes also have their toll on reinsurance. After Hurricane Andrewit it became clear that U.S. insurers had seriously underestimated the extent of their liability for property losses in a mega disaster. Reinsurers subsequently reassessed their position, which in turn caused primary companies to reconsider their catastrophe reinsurance needs. 2. Reinsurance "Reinsurance is a means by which an insurance company can protect itself against the risk of losses with other insurance companies" (Wikipedia). Individuals and corporations obtain insurance policies to provide protection for various risks (hurricanes, earthquakes, lawsuits, collisions, sickness and death, etc.). Reinsurers, in turn, provide insurance to insurance companies. Reinsurance is a type of risk management involving transfer of risk from insurer to the reinsurer. What that reinsurer does is to provide insurance for the insurers on the basis of a contract of indemnity. It works like this - the insurer gives the reinsurer a portion of the premium it collects from the insured and in return is covered for losses. A reinsurer enters into a