An investigation into the underwriting of excess of loss reinsurance

Abstract

This thesis sets out to develop the framework for an underwriting system for excess of loss reinsurance. A system is constructed and tested which builds on the strengths but avoids the most important practical limitations of existing judgemental or scientific methods. Key issues in the proposed method are the identification of underwriting decision criteria in the face of uncertainty and the important influence of the market in the decision process. The research involves the following stages. Firstly,. a conceptual framework is provided for tackling the problem effectively in a flexible but comprehensive manner. Secondly, a rigorous empirical examination of underwriting activities over a four year period is undertaken on data collected from an excess of loss underwriting agency operating in the London Market. Thirdly, from relationships established in the empirical investigation, an underwriting system is devised, subjected to sensitivity analysis, and tested in comparison with the performance of a professional excess of loss underwriter. From the research, the contribution to knowledge is as follows: 1) The first detailed study of excess of loss underwriters' actual decision­ making behaviour is provided; Z) Practical application of risk-theoretic techniques is demonstrated as being negligible among excess of loss un<;lerwriters; 3) Evidence is provided for the existence of a satisficing model for excess of loss underwriting decisions; · 4) An excess of loss. underwriting system based on market heuristics is constructed, tested and evaluated; 5) Wider implications of the fact that real units of trade may differ from how they are perceived by market operators are presented. and discussed. The research has important implications for the academic treatment, professional practice, and market supervision of excess of loss reinsurance