Reinsurance Multi Year Benefits??

[bananas]

Just looking at pricing a one year property reinsurance contract and have been asked whether there are any benefits related to doing a 2 or more year deal (not finite reinsurance though).
My initial reaction is NO ... the probability of loss is going to be the same in both years (since I price for one year based on annual expected) .. and it might actually put you in a worse situation since you are exposed for a longer time. For example, if you have a 20% probability of at least one loss in the first year, then you have an 80% prob of being clean. So for 2 clean years to happen, then 0.8*0.8 = 64% chance of no losses in two years.
Anyone have any comments?

[Avi]

Just looking at pricing a one year property reinsurance contract and have been asked whether there are any benefits related to doing a 2 or more year deal (not finite reinsurance though).
My initial reaction is NO ... the probability of loss is going to be the same in both years (since I price for one year based on annual expected) .. and it might actually put you in a worse situation since you are exposed for a longer time. For example, if you have a 20% probability of at least one loss in the first year, then you have an 80% prob of being clean. So for 2 clean years to happen, then 0.8*0.8 = 64% chance of no losses in two years.
Anyone have any comments?

Most of my experience is in casualty, but I would think that there is more risk to the reinsurer on a multi-year deal. Your trend, on-level, exposure, and, of course, parameter-risk (shhhhh) is now locked in for two years instead of one, and any error gets compounded. Further, the more data you have, the better your prediction, and undoubtedly you will have a better picture of year 2's expected losses AFTER year 1, but with a locked-in price there ain't nuthin y'all can do about it.

JMO (WATCM)

[joeorez]

1. If rates are going down, then all other things being equal the insurer might be better off locking in a fixed multi-year rate.

2. If exposure units increase unexpectedly in year two, you probably didn't contemplate that in your fixed rate.

3. If there is an annual aggregate limit L, then the cost of 2L is probably less than two times the cost of L.

[Happy New Year]

Stops you from having to renegotiate and price and stuff next year

[Avi]

Stops you from having to renegotiate and price and stuff next yearTwo-edged sword :)

[Happy New Year]

Good point. Anyway the contract probably has out clauses anyway so you may have to do just as much work

[Arlie_Proctor]

You're not going to get a yes or no answer in here to your question, based on the information you have supplied. Whether or not there is a benefit to either side depends on a lot of conditions, expectations, and the terms under which a two-year deal might be offered. You cannot share sufficient detail here to get a correct answer without violating client trust. Can you rephrase your question in terms of an abstract construct regarding certain terms of the potential contract? You may get more responses that way.

[DeepPurple]

Stops you from having to renegotiate and price and stuff next year

WRONGO!


These agreements are usually unilaterally biased against the reinsurer. If the ceding company has a bad year then they get the benefit of a fixed renewal rate with no increase. If they have a good year, they can (and will) renegotiate.

[Happy New Year]

WRONGO!!!