Modelling for insurers and reinsurers - case study

An insurer has an expected return on capital of 18% on £200m of capital, however, it wishes to examine its reinsurance programme to determine if it can gain a higher return on capital without changing its capital base. To determine if this can be achieved the insurer uses its model to examine, at a reinsurance contract level, both the effectiveness of its current reinsurance structure and a number of alternatives using both graphical and tabular exhibits.

The graphs below are examples of the typical graphical output that the insurer examines from a stochastic model to help determine the appropriateness of the reinsurance programme.

Graph 1
The graph below shows the gross versus net underwriting result for a class of business. From the graph it can be seen that when a there is a high gross underwriting profit there is a lower net one as the reinsurance programme is being paid for with few, if any, reinsurance recoveries. Conversely, if there is a gross underwriting loss the net result is better due to the operation of the reinsurance programme. 



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