Harvard Case - World Reinsurance Company: Excess-of-Loss Reinsurance Quote
"World Reinsurance Company: Excess-of-Loss Reinsurance Quote" Harvard business case study is written by Kyle Maclean, Jeffrey Wong. It deals with the challenges in the field of General Management. The case study is 4 page(s) long and it was first published on : Aug 16, 2021
At Fern Fort University, we recommend that World Reinsurance Company (WRC) decline the excess-of-loss reinsurance quote from the unnamed insurance company. This recommendation is based on a thorough analysis of WRC's current financial position, the risks associated with the proposed reinsurance contract, and the potential impact on WRC's long-term strategic goals. We believe that accepting this quote would be detrimental to WRC's profitability and could compromise its competitive advantage in the reinsurance market.
2. Background
This case study focuses on World Reinsurance Company (WRC), a leading international reinsurance provider seeking to expand its business in emerging markets. WRC is presented with an opportunity to underwrite an excess-of-loss reinsurance contract for a large insurance company. The proposed contract covers significant risks, including natural disasters and catastrophic events. The case study highlights the complexities of decision-making in the reinsurance industry, requiring a careful assessment of risk, pricing, and potential impact on WRC's overall portfolio.
The main protagonists in the case are:
- WRC's Management Team: Responsible for evaluating the reinsurance quote and making a decision on whether to accept or decline it.
- The Unnamed Insurance Company: Seeking reinsurance coverage to mitigate their exposure to catastrophic risks.
3. Analysis of the Case Study
Our analysis utilizes a combination of frameworks to assess the reinsurance quote and its potential impact on WRC:
a) Financial Analysis:
- Risk Assessment: The proposed reinsurance contract covers a wide range of catastrophic risks, including natural disasters and terrorism. WRC needs to carefully assess the probability and severity of these events to determine the potential financial impact.
- Pricing: The reinsurance quote must be analyzed to ensure that it adequately covers the potential risks and provides an acceptable return on investment for WRC.
- Capital Adequacy: WRC must ensure that it has sufficient capital reserves to cover potential losses from the reinsurance contract.
- Profitability: The reinsurance contract must contribute positively to WRC's overall profitability.
b) Strategic Analysis:
- Competitive Advantage: WRC needs to consider how accepting the reinsurance quote would impact its competitive advantage in the reinsurance market.
- Growth Strategy: The reinsurance contract should align with WRC's overall growth strategy and expansion into emerging markets.
- Risk Management: The reinsurance contract should be carefully managed to minimize potential losses and protect WRC's financial stability.
c) SWOT Analysis:
- Strengths: WRC's strong financial position, experienced underwriting team, and established reputation in the reinsurance market.
- Weaknesses: Potential for increased risk exposure and the need to manage potential conflicts of interest.
- Opportunities: Expanding into emerging markets and diversifying its reinsurance portfolio.
- Threats: Competition from other reinsurance companies and the potential for unforeseen catastrophic events.
d) Porter's Five Forces:
- Threat of New Entrants: The reinsurance market is relatively concentrated, but new entrants could pose a threat to WRC's market share.
- Bargaining Power of Buyers: The insurance company seeking reinsurance coverage has significant bargaining power, potentially pushing for lower premiums.
- Bargaining Power of Suppliers: WRC's suppliers, such as reinsurers and data providers, have limited bargaining power.
- Threat of Substitutes: Alternative risk management strategies, such as self-insurance, could pose a threat to the reinsurance market.
- Rivalry Among Existing Competitors: Competition among reinsurance companies is intense, requiring WRC to maintain a competitive advantage.
4. Recommendations
Based on the analysis, we recommend that WRC decline the excess-of-loss reinsurance quote for the following reasons:
- High Risk: The proposed reinsurance contract covers significant risks with a high potential for losses.
- Unfavorable Pricing: The reinsurance quote does not adequately compensate WRC for the level of risk involved.
- Impact on Profitability: Accepting the reinsurance quote could negatively impact WRC's overall profitability.
- Strategic Misalignment: The reinsurance contract does not align with WRC's strategic goals of expanding into emerging markets and maintaining a strong financial position.
5. Basis of Recommendations
Our recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: WRC's core competency lies in providing reinsurance solutions that are both profitable and strategically aligned with its mission. Accepting this quote would deviate from this core competency.
- External Customers and Internal Clients: WRC's external customers are insurance companies seeking reinsurance coverage. Internal clients include shareholders and employees. Declining the quote protects WRC's financial stability and ensures a positive return on investment for shareholders.
- Competitors: WRC needs to maintain a competitive advantage in the reinsurance market. Accepting the quote could compromise this advantage by exposing WRC to unnecessary risk.
- Attractiveness - Quantitative Measures: The reinsurance quote does not offer an attractive return on investment for WRC. The potential for losses outweighs the potential for profits.
6. Conclusion
While expanding into emerging markets is a strategic goal for WRC, accepting this specific reinsurance quote would be a risky and potentially unprofitable decision. WRC should focus its efforts on identifying reinsurance opportunities that align with its core competencies, risk appetite, and long-term strategic goals.
7. Discussion
Other alternatives to declining the reinsurance quote include:
- Negotiating a lower premium: WRC could attempt to negotiate a lower premium with the insurance company. However, this would require a significant change in the risk assessment and pricing structure.
- Accepting the quote with modifications: WRC could accept the quote with modifications, such as reducing the coverage or increasing the deductible. However, these modifications could reduce the value of the reinsurance contract for the insurance company.
The key risks associated with declining the reinsurance quote include:
- Loss of potential business: Declining the quote could lead to the insurance company seeking reinsurance coverage from a competitor.
- Damage to reputation: Declining the quote could damage WRC's reputation with the insurance company.
8. Next Steps
WRC should take the following steps to implement our recommendations:
- Communicate the decision to the insurance company: WRC should provide a clear and concise explanation for declining the reinsurance quote.
- Review its reinsurance strategy: WRC should review its reinsurance strategy to ensure that it aligns with its core competencies and long-term strategic goals.
- Identify new reinsurance opportunities: WRC should actively seek out new reinsurance opportunities that offer a favorable risk-reward profile.
- Develop a robust risk management framework: WRC should develop a robust risk management framework to mitigate potential losses from its reinsurance portfolio.
By following these recommendations, WRC can ensure that its reinsurance business remains profitable and sustainable in the long term.
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Case Description
An actuarial intern at World Reinsurance Company was casually checking his e-mail and noticed that he had received a request from his manager to develop a quote for an upcoming request for proposal from one of World Reinsurance Company's larger clients, Ontario Life. The request for proposal would have to contain a quote for an excess-of-loss policy to reinsure Ontario Life's 10-year-term life insurance policy, consisting of 100 high-risk policyholders, for retention limits over CA$250,000 on a per-loss basis. The quote was to be submitted for review by the end of the day, so the intern had to get started on it immediately.
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