ARe 321 Flashcards
Reinsurance
The transfer of insurance risk from one insurer to another through a contractual agreement under which one
insurer (the reinsurer) agrees, in return for a reinsurance premium, to indemnify another insurer (the primary insurer) for some or all of the financial consequences of certain loss exposures covered by the primary’s insurance
policies.
Portfolio reinsurance
Reinsurance that transfers to the reinsurer liability for an entire type of insurance, territory, or book of business after the primary insurer has issued the policies.
Securitization of risk
The use of securities or financial instruments (for example, stocks, bonds, commodities, financial futures) to finance an insurer’s exposure to catastrophic loss.
Special purpose vehicle (SPV)
A facility established for the purpose of purchasing income-producing assets from an organization, holding title to them, and then using those assets to collateralize securities that will be sold to investors.
Strike price
The price at which the stock or commodity underlying a call option (such as a warrant) or a put option can be purchased (called) or sold (put) during a specified period.
Ceding commission
An amount paid by the reinsurer to the primary insurer to cover part or all of the primary insurer’s policy acquisition expenses and other costs.
Profit-sharing commission
A ceding commission that is contingent on the reinsurer realizing a predetermined percentage of excess profit on ceded loss exposures.
Treaty reinsurance
A reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurer’s individual loss exposures that fall within the treaty are automatically reinsured.
Facultative reinsurance
Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted.
Pro rata reinsurance
A type of reinsurance in which the primary insurer and reinsurer proportionately share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses).
Excess of loss reinsurance
A type of reinsurance in which the primary insurer is indemnified for the portion of each loss that exceeds a specified dollar amount.
Quota share reinsurance
A type of pro rata reinsurance in which the primary insurer and the reinsurer share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) using a fixed percentage.
Primary insurer
In reinsurance, the insurer (also referred to as the ceding company) that transfers or cedes all or part of the insurance risk it has assumed to another insurer in a contractual arrangement.
Surplus share reinsurance
A type of pro rata reinsurance in which the policies covered are those whose amount of insurance exceeds a stipulated dollar amount, or line.
Captive insurer, or captive
A subsidiary formed to insure the loss exposures of its parent company and the parent’s affiliates.
Fronting company
A licensed insurer that issues an insurance policy and reinsures the loss exposures back to a captive insurer owned by the insured organization.
Retrocession
A reinsurance agreement whereby one reinsurer (the retrocedent) transfers all or part of the reinsurance risk it has assumed or will assume to another reinsurer (the retrocessionaire).
Variable quota share treaty
A quota share reinsurance treaty in which the cession percentage retention varies based on specified predetermined criteria such as the amount of insurance needed.
Flat commission
A ceding commission that is a fixed percentage of the ceded premiums.
Sliding scale commission
A ceding commission based on a formula that adjusts the commission according to the profitability of the reinsurance agreement.
Ceding company
The insurer that transfers or cedes all or part of the insurance risk it has assumed to another insurer in a contractual arrangement.
Line guide
A document that provides the minimum and maximum line a primary insurer can retain on a loss exposure.
Quota share treaty
A pro rata reinsurance agreement under which the primary insurer cedes a fixed, predetermined percentage of every loss exposure it insures within a class or classes.
Occupancy
The type or character of use of the property in question.
Attachment point
The dollar amount above which the reinsurer responds to losses.
Co-participation provision
A provision in a reinsurance agreement that requires the primary insurer to retain a specified percentage of the losses that exceed its attachment point.
Rating (Pricing)
The process of applying an applicable rate and rating plan to a particular exposure and performing any other necessary calculations to determine the policy premium for that exposure.
Experience rating
A rating plan that adjusts the premium for the current policy period to recognize the loss experience of the insured organization during past policy periods.
Exposure rating
An approach to reinsurance treaty pricing that considers the amount of liability inherent in the type of business covered by the treaty being priced.
Subject premium
The premium the primary insurer charges on its underlying policies and to which a rate is applied to determine the reinsurance premium.
Flat rate (treaty pricing)
A fixed rate that is not adjusted for losses occurring under the reinsurance treaty and that is applied to the primary insurer’s prospective premiums.
Loss rate (treaty pricing)
A rate that is determined from the actual losses sustained under a reinsurance treaty. A loss-rated cover usually has three rates—a provisional rate; a minimum rate; and a maximum rate, which should also coincide with the exposure rate.
Casualty excess of loss reinsurance
A type of excess of loss reinsurance that covers losses arising out of the primary insurer’s underlying casualty insurance policies.
Clash cover
A type of per occurrence excess of loss reinsurance for liability loss exposures that protects the primary insurer against aggregations of losses from one occurrence that affects several insureds or several types of insurance.
Extracontractual obligations
Damages awarded against the primary insurer in favor of the insured as a result of the primary insurer’s bad faith, fraud, or gross negligence in handling a claim.
Catastrophe excess of loss reinsurance
A type of excess of loss reinsurance that protects the primary insurer from an accumulation of retained losses that arise from a single catastrophic event.
Reinsurance limit
The maximum amount that the reinsurer will pay for a claim and that is commonly stated in the reinsurance agreement.
Loss occurrence clause
A reinsurance agreement clause that defines the scope of a catastrophic occurrence for the purposes of the agreement.
Probable maximum loss (PML)
The largest loss that an insured is likely to sustain.
Payback period
The number of years that a treaty would need to continue at the present reinsurance premium for the reinsurer to recoup the payment of the reinsurance limit under the treaty.
Rate on line (ROL)
A measure of the appropriateness of the reinsurance
premium relative to the reinsurance limit.
Incurred but not
reported (IBNR)
reserves
A reserve established for losses that reasonably can be assumed to have been incurred but not yet reported.
Predictive modeling
A process in which historical data based on behaviors and events is blended with multiple variables and used to construct models of anticipated future outcomes.
Surplus relief
A replenishment of policyholders’ surplus provided by the ceding commission paid to the primary insurer by the reinsurer.
Loss adjustment expense (LAE)
The expense that an insurer incurs to investigate, defend, and settle claims according to the terms specified in the insurance policy.
Loss adjustment expense reserves
Estimates of the future expense that an insurer expects to incur to investigate, defend, and settle claims for losses that have already occurred.
Paid losses
Losses that have been paid to, or on behalf of, insureds during a given period.
Incurred losses
The losses that have occurred during a specific period, no matter when claims resulting from the losses are paid.
Accident-year method
A method of organizing ratemaking statistics that uses incurred losses for an accident year, which consist of all losses related to claims arising from accidents that occur during the year, and that estimates earned premiums by formulas from accounting records.
Ultimate loss
The final paid amount for all losses in an accident year.
Flat dollar amount applied to each loss under an aggregate excess of loss reinsurance treaty, which is acts similarly to a deductible
Internal retention
Primary function of an aggregate excess of loss reinsurance treat
Stabilize a primary insurer’s loss results
Factors affecting a primary insurer’s reinsurance limit selection
Maximum policy limit, extracontractual obligations, and loss adjustment expenses
Service of suit clause
Ensure that surplus lines insurers (i.e. those not licensed in the US or in a particular state) can still usually be sued in the US courts
Public protection class (homeowners)
A rating that indicates the level of protection by the fire department for your area. The rating is on a scale of 1-10, with 1 representing a superior level of property fire protection.
Most important thing for pricing homeowners line guide.
How are loss adjustment expenses considered?
Included in the loss amount when applying the retention and reinsurance limit
Types of reinsurance audit
Underwriting, transactional, claim
Underwriting audit key features
Assess coverage, pricing and selection decisions & gain familiarity with primary insurer’s underwriting philosophy
Transactional audit key features
Verify accuracy of premium, loss and commission data submitted to reinsurer & evaluate primary insurer’s reinsurance reporting controls
Claim audit key features
Determine whether claims are covered by a treaty under review, monitor trends in losses, assess primary insurer’s claims staff and claims handling procedures & discover information for a disputed claim.
Surplus share characteristics
When an underlying policy’s total amount of insurance exceeds a stipulated dollar amount, a reinsurer assumes the surplus share of the amount of insurance (the difference between the primary insurer’s line and the total amount of insurance).
Internal & outside retention (aggregate XOL)
Inside - Usually a flat dollar amount applied to each loss (similar to a deductible), which the primary insurer retains and applies on a per risk or per occurrence basis.
For the treaty to respond, the sum of losses exceeding the internal retention must exceed the outside retention during the treaty term.
Catastrophe modeling components
Hazard - Simulates a cat event to determine probability and intensity.
Engineering - Uses intensity from hazard component to estimate extent of structural damage from event.
Financial - translates this to monetary loss.
Stop loss reinsurance
A form of reinsurance under which the reinsurer pays the cedant’s losses in any year over a particular percentage of the earned premium
Contingent surplus note
An insurer provides a pre-agreed rate of return to the purchaser, contingent on the occurrence of a loss event. Insurer can immediately obtain funds in the event of a catastrophe. A benefit is they increase a assets without increasing liabilities—and thus increase the insurer’s capacity to write business.
Catastrophe modeling outputs
Average annual loss (AAL) - long term average loss for in force policies for the risk modeled. Expressed as average loss per unit of exposure.
Exceedance probability curve - full spectrum of potential losses and associated probability of occurrence.
Claims and Loss Adjustment Expense Clause
States the circumstances under which the primary insurer must report and the reinsurer must pay a liability claim—and how loss adjustment expense will be handled.
Term clause - catastrophe
Usually have a one-year term, but they can be provided on a multiple-year term or on a continuous basis with annual termination provisions. The term clause defines the exact term of the reinsurance treaty.
Tail factor
Factor used to develop data for future periods based on loss development triangles. Typically used in casualty XOL rates.
Purpose of a reinsurance audit
To evaluate the business ceded under the reinsurer’s treaties from the primary insurer
When considering an override, what is a Reinsurer particularly considering?
Competition in the reinsurance marketplace - When competitive, reinsurers are willing to offer higher ceding commissions than they otherwise would.
Key regulatory concern that regulators have regarding the use of reinsurance?
The standards by which an insurer can take credit for reinsurance
The experience and exposure rating methods develop a rate that reflects only the costs associated with losses expected during the rating period, the loss cost rate. The loss cost rate is then increased to reflect?
Internal expenses, profit & contingencies, LAE, catastrophe charge
Considerations for max retention in its reinsurance program
Primary insurer’s financial strength and regulatory requirements.
