4b Role of Actuaries in General Insurance 4C Flashcards
Reinsurance is a financial transaction where risk is transferred from an insurance company (cedant) to a reinsurance company (reinsurer) in exchange for a payment (reinsurance premium).
Risk transfer:
Reinsurance providers:
Reinsurance treaty:
Definitive treaties and slips:
Legal entities:
Retrocession:
Retrocessionaries:
Risk acceptance:
Risk diversification:
Risk transfer:
Catastrophic events:
Scrutiny required:
Illicit activities: Reinsurance agreements without risk transfer should be questioned for potential illegal activities.
Reinsurance is a financial transaction where risk is transferred from an insurance company (cedant) to a reinsurance company (reinsurer) in exchange for a payment (reinsurance premium).
Risk transfer: Reinsurance involves transferring risk from the cedant to the reinsurer.
Professional reinsurers are entities exclusively dedicated to the activity of reinsurance, while insurance companies in most jurisdictions are also allowed to participate in reinsurance.
Reinsurance providers: Reinsurers are professional entities dedicated to reinsurance, while some insurance companies can also participate.
Reinsurance transactions are defined in a reinsurance treaty, which is a contract outlining the terms of the agreement between the cedant and the reinsurer.
Reinsurance treaty: The terms of a reinsurance transaction are documented in a reinsurance treaty.
Definitive reinsurance treaties are sometimes signed months after the risk transfer occurs, and in the interim, a shorter version called a slip is used to document the acceptance of the risk by the reinsurer.
Definitive treaties and slips: The full reinsurance treaty is often signed later, while slips containing essential terms are used initially.
Reinsurance involves legal entities and not individuals, distinguishing it from coinsurance where risk is shared among multiple insurance companies.
Legal entities: Reinsurance involves legal entities, while coinsurance allows multiple insurance companies to share risk.
Retrocession is a similar financial transaction where reinsurers transfer risks to other entities called retrocessionaires.
Retrocession: Reinsurers can transfer risks to retrocessionaires through a similar transaction.
Retrocessionaires are expected to keep and not further transfer the assumed risk to other entities, ensuring reinsurers and insurers do not unknowingly assume risks they transferred.
Retrocessionaries: Retrocessionaires are expected to retain the assumed risk and not transfer it further.
Reinsurance allows insurance companies to accept risks that may exceed their financial strength, satisfying clients’ needs and avoiding the burden of coinsurance.
Risk acceptance: Reinsurance enables insurance companies to accept risks beyond their financial capacity.
Reinsurance allows insurance companies to diversify their risk portfolio by ceding part of the risk, reducing concentration and volatility of annual results.
Risk diversification: Reinsurance helps insurance companies diversify their risk portfolio.
Reinsurance enables insurance companies to transfer risks off their balance sheets, reducing statutory surplus requirements and capital needed.
Risk transfer: Reinsurance allows insurance companies to transfer risks, reducing capital requirements.
Reinsurance is used to address extreme and infrequent events, such as natural disasters, by transferring exposure to reinsurers who specialize in catastrophic protection.
Catastrophic events: Reinsurance provides a more economical way to handle extreme events.
Reinsurance facilitates knowledge acquisition for insurance companies entering new markets, lines of business, or launching new products.
Knowledge acquisition: Reinsurance allows insurers to gain expertise in different markets and insurance techniques.
Reinsurance can provide a source of financing for insurance companies, especially in cases of upfront financing requirements in life insurance business.
Financing source: Reinsurance can provide financing for insurance companies, including advance of expected profits.
Reinsurance agreements should be scrutinized when none of the aforementioned needs are present, as reinsurance flexibility has been misused for illegal activities.
Scrutiny required: Reinsurance agreements without valid needs should be carefully examined due to potential misuse.
Reinsurance agreements that do not transfer any type of risk are questionable and may be used for illicit purposes.
Illicit activities: Reinsurance agreements without risk transfer should be questioned for potential illegal activities.
Reinsurance treaties often include a provision called a cut-through clause, which allows the insured to have a direct legal claim to the reinsurer in special situations, such as when the insurer becomes insolvent.
Cut-through clause:
Retrocession treaty wording:
Knowledge acquisition:
Financing option:
Counterparty risk:
Managing catastrophic risks:
Knowledge acquisition for reinsurers:
Performance-based repayment:
Differentiating genuine needs:
Riskless reinsurance agreements:
Importance of reinsurance:
Reinsurance treaties often include a provision called a cut-through clause, which allows the insured to have a direct legal claim to the reinsurer in special situations, such as when the insurer becomes insolvent.
Cut-through clause: In certain cases, reinsurance treaties may have a provision that enables the insured to directly claim from the reinsurer.
Retrocession treaty wording plays a crucial role in preventing unexpected over retention for retrocedants, as retrocessionaires transferring assumed risks beyond what was agreed can create complications.
Retrocession treaty wording: Proper wording in retrocession treaties helps prevent unexpected over retention for retrocedants.
Reinsurers, operating in multiple markets and collaborating with different insurance companies, acquire significant knowledge about various products, markets, and insurance techniques, which can be beneficial when entering new markets or launching new products.
Knowledge acquisition: Reinsurers gain expertise in different products, markets, and insurance techniques through their involvement with various insurance companies.
Reinsurance agreements can involve the transfer of underwriting, administration, or other activities related to the transferred risk from the insurer to the reinsurer, allowing insurers to focus on their core business.
Outsourcing non-core activities: Reinsurance agreements may include the transfer of non-core activities from the insurer to the reinsurer.
Reinsurance can be used as a source of upfront financing, particularly in rapidly growing insurance activities like life insurance, where the reinsurer may advance future expected profits in the form of reinsurance commissions.
Financing option: Reinsurance can provide upfront financing by advancing future expected profits.
Reinsurance reduces technical risk for insurance companies, but it introduces counterparty risk since the ultimate responsibility to policyholders still rests with the insurance company. To mitigate this risk, additional surplus is usually required, and the amount may vary based on the reinsurer’s solvency rating.
Counterparty risk: Reinsurance reduces technical risk but introduces counterparty risk, requiring additional surplus as a safeguard.
Reinsurance effectively addresses the exposure to extreme and infrequent events, allowing insurance companies to manage catastrophic risks in a more economically feasible way compared to individual insurance coverage.
Managing catastrophic risks: Reinsurance provides a cost-effective approach to manage exposure to rare and severe events.
Reinsurance activities enable reinsurers to gain significant knowledge about different products, markets, and insurance techniques, enhancing their capabilities and expertise.
Knowledge acquisition for reinsurers: Reinsurance activities contribute to the expertise and capabilities of reinsurers.
Reinsurance agreements may offer repayment of financing contingent upon the performance of the reinsured business. If the repayment is solely based on performance, it may not need to be reported as a liability on the cedant’s balance sheet.
Performance-based repayment: Reinsurance financing may be repaid based on the performance of the reinsured business.
It is important to distinguish genuine reinsurance needs from potential misuse, as reinsurance treaties have been exploited in the past for illegal activities such as tax avoidance and money laundering.
Differentiating genuine needs: Reinsurance agreements should be examined to distinguish legitimate needs from potential illicit activities.
Reinsurance agreements that do not involve any risk transfer can raise suspicions and require careful examination due to the potential for fraudulent or illegal purposes.
Riskless reinsurance agreements: Reinsurance agreements without risk transfer should be scrutinized for potential fraudulent or illegal intentions.
Reinsurance plays a critical role in the insurance industry by providing risk management, financial stability, diversification, and expertise, benefiting both insurers and policyholders.
Importance of reinsurance: Reinsurance contributes to risk management, financial stability, diversification, and expertise in the insurance industry.
Reinsurance supports the overall stability and sustainability of the insurance market by ensuring that insurers can fulfill their obligations to policyholders, even in the face of significant losses or catastrophic events.
Market stability
Factors affecting reinsurance availability and cost:
Regulatory oversight:
Reinsurance supports the overall stability and sustainability of the insurance market by ensuring that insurers can fulfill their obligations to policyholders, even in the face of significant losses or catastrophic events.
Market stability: Reinsurance helps maintain stability in the insurance market by ensuring insurers can meet their obligations.
The availability and cost of reinsurance can be influenced by various factors, including the frequency and severity of recent losses, the reinsurer’s perception of the cedant’s underwriting quality, and the prevailing market conditions.
Factors affecting reinsurance availability and cost: Availability and cost of reinsurance are influenced by recent losses, underwriting quality, and market conditions.
Reinsurance is subject to regulatory oversight to ensure proper risk management, adequate capitalization, and compliance with legal and accounting standards.
Regulatory oversight: Reinsurance activities are regulated to ensure risk management, capital requirements, and compliance with regulations and accounting standards.
Most reinsurance contracts fall into two categories: automatic treaty and facultative.
Automatic treaty
Facultative treaty
Facultative-obligatory reinsurance is a
Treaty reinsurance allows the cedant to
Reinsurers conduct due diligence on the insurance company to assess its expertise, risk attitude, track record, expected amount of business, and other technical aspects.
Regular a
The reinsurer participates
Reinsurance can be categorized as proportional (pro rata) or non-proportional (excess of loss).
Proportional reinsurance involves a sharing of premium, claims, and expenses between the cedant and reinsurer.
Non-proportional reinsurance provides
The premium, expenses, and claims are shared in the same proportion with the reinsurer. insured that the cedant retains on its own.
The reinsurer assumes the portion of the risk that exceeds the rete
Most reinsurance contracts fall into two categories: automatic treaty and facultative.
Automatic treaty reinsurance involves the automatic cession of defined risks to the reinsurer, who agrees to accept all those risks.
Facultative treaty reinsurance allows the cedant (insurer) to decide which risks to offer to the reinsurer, who then decides on an individual basis whether to accept or reject each offered risk.
Facultative-obligatory reinsurance is a less common treaty structure where the offering of risks is facultative, but once offered, the reinsurer is obligated to accept them.
Treaty reinsurance offers “blind acceptance” of risks to the cedant, requiring a strong level of trust between the cedant and reinsurer.
Treaty reinsurance allows the cedant to act independently and quickly when accepting risks covered by the reinsurance agreement.
The acceptance of risks and financial conditions are negotiated and agreed upon in advance in treaty reinsurance.
Reinsurers conduct due diligence on the insurance company to assess its expertise, risk attitude, track record, expected amount of business, and other technical aspects.
Regular audits are conducted by reinsurers to ensure compliance with underwriting guidelines, treaty objectives, proper accounting, and administration.
Facultative reinsurance is suitable for insuring large, complex, or unusual risks.
The reinsurer participates in the underwriting and assessment of each risk.
The reinsurer has the option to accept or reject each risk based on its own evaluation.
The specific terms of the reinsurance agreement, such as premium and exclusions, are negotiated between the cedant and reinsurer.
Reinsurance can be categorized as proportional (pro rata) or non-proportional (excess of loss).
Proportional reinsurance involves a sharing of premium, claims, and expenses between the cedant and reinsurer.
Non-proportional reinsurance provides coverage based on the actual losses suffered by the insurer, rather than the sum insured.
Quota Share reinsurance is a form of proportional reinsurance where a fixed proportion of each risk is ceded to the reinsurer.
The premium, expenses, and claims are shared in the same proportion with the reinsurer.
Reinsurers pay the cedant a reinsurance commission to compensate for acquisition and administrative expenses.
Profit sharing formulas may be included to reward the cedant for underwriting quality.
Surplus reinsurance is another type of proportional reinsurance where the cedant retains a specific amount of risk and reinsures the surplus.
The retention amount is the maximal sum insured that the cedant retains on its own.
The reinsurer assumes the portion of the risk that exceeds the retention up to the capacity of the contract.
The reinsurer’s participation varies based on the sum insured of each risk.
