A Statistical Information System for the Decision-Making of Reinsurance Retention

The Korean insurance industry is pursuing liberalization, breaking away from the former protective measures against foreign competition. Especially in the reinsurance market, which has been more international in nature, gradual liberalization has already been progressed since 1984. The restriction on the level of retention limit per risk and the requirement that Korean direct insurers must cede a stipulated proportions of their total direct business to Korean Re which is the only professional reinsurer in Korea have been abolished in 1990. Further, the requirement that direct insurers in need of reinsurance must first seek such coverage within the domestic market before resorting to foreign markets andagreement between Korean Re and 14 Korean non-life insurers that for certain lines of insurance only Korean Re may acquire foreign rates were nullified in April 1997. Therefore, the Korean reinsurance market at present is a completely liberalized market, at least in the legal sense. Despite such positive effects as the efficiency gains expected from liberalization, it has been questioned if the Korean reinsurance industry, which is comparatively lacking in operational skill for rating, underwriting and information gathering, accomodates complete liberalization without much trouble. Noting that most problems expected from reinsurance liberalization practically relate to the insolvency and profitability of Korean direct insurers, we suggest an algorithm to develop a statistical information system to assist decision-making of reinsurance retention which considers insolveny probability and expected profit.