Purpose
Evaluate the current reinsurance program against alternative structures and quantify the trade-off each option makes between cost of cover, net retained loss volatility, expected profit, and capital relief — so the renewal decision rests on modeled economics rather than broker anecdote or last year's structure.
When to Use
Invoke this skill when the user asks to:
- Prepare for an annual reinsurance treaty renewal or restructuring
- Compare retention levels, layer structures, or quota-share vs. excess-of-loss options
- Assess whether current cessions are cost-efficient given loss experience
- Stress-test net retained volatility against catastrophe or large-loss scenarios
- Align reinsurance purchasing with capital, RBC/Solvency, or ROE targets
- Justify a change in ceded premium spend to the board or capital committee
Inputs Required
Before starting, collect:
- Line of business & exposure base: Which book(s), gross written premium, and exposure profile (property cat, casualty, marine, etc.)
- Current program structure: Treaty types (QS, surplus, XoL, aggregate, stop-loss), attachment points, limits, layers, and cession percentages
- Ceded premium costs: Rate-on-line or ceded premium by layer, plus ceding commissions, reinstatements, and profit commissions
- Loss scenarios: Historical loss experience, modeled AAL/PML by return period, and any specific stress scenarios (1-in-100, 1-in-250) to test
- Alternative structures to evaluate: Any specific options the user wants compared (if none, generate reasonable alternatives)
- Capital & risk appetite: Target retained volatility, capital charge relief sought, and any regulatory framework (RBC, Solvency II, BMA)
- Objective priority: Rank of expected-profit maximization vs. volatility minimization vs. capital efficiency
If modeled loss distributions are unavailable, request return-period loss estimates and note that outputs are scenario-based rather than full-distribution results.
Instructions
Step 1: Baseline the Current Program
Establish the reference case before comparing alternatives:
- Restate gross written premium, gross expected loss, and gross loss volatility (standard deviation or specified return-period losses)
- Calculate ceded premium as a total and as rate-on-line per layer
- Compute net retained expected loss = gross expected loss − expected recoveries by structure
- Compute net retained expected profit = net premium − net expected loss − expenses
- State the current net loss volatility and identify the retained tail (losses above top layer or outside cover)
Step 2: Define Alternative Structures
Model 3–5 alternatives against the baseline. If the user hasn't specified them, construct a spread that isolates distinct levers:
- Higher retention / thinner cover: Raise attachment, reducing ceded premium but increasing retained volatility
- Lower retention / deeper cover: Buy down the attachment, increasing cost but smoothing results
- Quota-share shift: Adjust cession % to trade proportional premium and commission economics against retained upside
- Structural swap: Replace or supplement XoL with aggregate/stop-loss cover to cap net accumulation
- Blended optimization: Combine levers to hit the stated capital or volatility target at minimum cost
For each alternative, hold exposure constant and vary only the treaty terms.
Step 3: Model Economics per Structure
For each structure (baseline + alternatives), compute across the loss scenarios:
- Ceded premium & net premium: Including commissions and expected reinstatement cost
- Expected recoveries: Modeled recovery by layer under the loss distribution/scenarios
- Net retained expected loss: Gross loss less expected recoveries
- Net expected profit: Net premium − net loss − expenses
- Net retained loss volatility: Standard deviation of net result, plus net loss at key return periods (e.g., 1-in-100, 1-in-250)
- Cost of protection efficiency: Ceded premium per unit of volatility reduced (marginal cost of each dollar of volatility removed)
- Capital relief: Estimated reduction in required capital / RBC charge and resulting ROE effect
Present these side by side in a comparison table with the baseline as the anchor column.
Step 4: Evaluate the Trade-Off Frontier
Plot each structure on the expected-profit vs. retained-volatility trade-off:
- Identify structures that are dominated (lower profit AND higher volatility than another) and eliminate them
- Rank the remaining efficient structures by the user's stated objective priority
- Flag the point of diminishing returns — where additional ceded premium buys little marginal volatility reduction
- Note tail-risk exposure each structure leaves unprotected (gaps above top layer, aggregate erosion, exhaustion risk)
Step 5: Recommend and Justify
- Name the recommended structure and the objective it optimizes
- State the specific trade the insurer is making versus the current program (e.g., "$X more ceded premium buys Y% net volatility reduction and Z bps of capital relief")
- Identify residual risks and what would change the recommendation (rate environment, exposure growth, loss trend)
- List 3–5 negotiation levers for the renewal (commission terms, reinstatement provisions, aggregate features, multi-year lock)
Output Format
- Structure: Baseline summary → alternative structure definitions → side-by-side comparison table → trade-off analysis → recommendation
- Length: 1,000–1,400 words plus the comparison table
- Format: Structured analytical document with one central comparison table (structures as columns; ceded premium, net expected loss, net expected profit, net volatility, return-period net loss, cost-per-volatility-reduced, and capital relief as rows)
- Sections: Current Program Baseline → Alternative Structures Evaluated → Economics Comparison Table → Trade-Off Frontier → Recommendation & Negotiation Levers → Residual Risk Notes
- Tone: Chief actuary / reinsurance director — quantitative, decision-oriented, explicit about assumptions and where the model is scenario-based vs. distribution-based
Quality Checklist
Before delivering output, verify:
- [ ] Every alternative reports all five core metrics: ceded premium, net expected loss, net expected profit, net volatility, and capital relief
- [ ] The comparison table anchors on the current program and holds exposure constant across structures
- [ ] Return-period net losses (at least two return periods) are shown for each structure
- [ ] Dominated structures are explicitly identified and eliminated, not just listed
- [ ] The recommendation states the specific premium-for-volatility trade in quantified terms, not directionally
- [ ] Residual tail-risk gaps (above top layer or aggregate exhaustion) are named for the recommended structure
Notes
- The single most useful output is the cost-per-unit-of-volatility-reduced — it exposes where a program overpays for marginal protection near the top of the tower
- When loss data is thin, model 1-in-100 and 1-in-250 scenarios explicitly and flag that volatility figures are scenario-anchored rather than derived from a fitted distribution
- Ceding commission and profit commission terms often move net economics more than attachment changes on proportional treaties — always model them, not just rate-on-line
- Capital relief estimates should state the framework used (RBC, Solvency II, BMA) since the charge structure changes which cessions are most efficient
How to use this skill
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