ARe 322

Question 1

Reinsurance intermediary

Answer 1

An intermediary that works with primary insurers to develop reinsurance programs and that negotiates contracts of reinsurance between the primary insurer and reinsurer, receiving commission for placement and other services rendered.

Question 2

Reinsurance program

Answer 2

The combination of reinsurance agreements that a primary insurer purchases to meet its reinsurance needs.

Question 3

Retrocession

Answer 3

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).

Question 4

Risks attaching basis

Answer 4

A reinsurance attachment basis that covers policies issued or renewed by the primary insurer on or after the reinsurance treaty’s effective date.

Question 5

Losses occurring basis

Answer 5

A reinsurance attachment basis that covers the unearned portion of policies in force as well as policies issued or renewed by the primary insurer on or after the reinsurance treaty’s effective date until the end date.

Question 6

Policies issued basis

Answer 6

A reinsurance attachment basis that covers only new policies issued on or after the reinsurance treaty’s effective date.

Question 7

In-force policies basis

Answer 7

A reinsurance attachment basis that covers only the unearned portion of in-force policies.

Question 8

Nuclear incident exclusion clause

Answer 8

A reinsurance treaty clause that excludes nuclear loss exposures, except for specific incidental loss exposures.

Question 9

Pollution exclusion clause

Answer 9

A reinsurance treaty clause that excludes loss or damage resulting from pollution.

Question 10

War risk exclusion clause

Answer 10

A reinsurance treaty clause that excludes loss or damage resulting from organized war or warlike activities.
The exclusion does not apply to loss exposures located in the U.S. if the primary insurer’s policy includes a standard war risk exclusion clause.
The exclusion does not apply to losses from general riots, strikes, and civil commotion.

Question 11

Terrorism exclusion clause

Answer 11

A reinsurance treaty clause excludes loss or damage resulting from acts of terrorism.

Question 12

Insolvency fund exclusion clause

Answer 12

A reinsurance treaty clause that states that reinsurers will not indemnify primary insurers for any assessments that the primary insurers must pay to state guaranty funds because of another primary insurer’s insolvency.

Question 13

State guaranty funds

Answer 13

Nonprofit, unincorporated associations established in all states to pay the outstanding claims of insolvent primary insurers.

Question 14

Loss occurrence clause

Answer 14

A reinsurance agreement clause that defines the scope of a catastrophic occurrence for the purposes of the agreement.

Question 15

Continuous contract

Answer 15

A reinsurance treaty that remains in effect until canceled by one of the parties to the treaty.

Question 16

Term contract

Answer 16

A reinsurance treaty that terminates on a specific date.

Question 17

Run-off basis

Answer 17

A reinsurance treaty provision that allows all policies in force at the date of termination to be covered under the treaty until they expire.

Question 18

Cut-off basis

Answer 18

A reinsurance treaty provision that allows the reinsurer’s responsibility for losses occurring under the primary insurance policies to end at the treaty’s termination date.

Question 19

Co-participation provision

Answer 19

A provision in a reinsurance agreement that requires the primary insurer to retain a specified percentage of the losses that exceed its attachment point.

Question 20

Annual aggregate deductible

Answer 20

A provision in which the primary insurer retains its normal retention on each loss plus an aggregate amount of the total losses during the year, up to the aggregate deductible amount.

Question 21

Deposit premium

Answer 21

The amount the primary insurer pays the reinsurer pending the determination of the actual reinsurance premium owed.

Question 22

Bordereau

Answer 22

A report the primary insurer provides periodically to the reinsurer that contains a history of all loss exposures reinsured under the treaty.

Question 23

Cash call

Answer 23

A reinsurance treaty provision that permits the primary insurer to obtain payment from the reinsurer for certain losses without having to wait until the next payment period.

Question 24

Sliding scale commission

Answer 24

A ceding commission based on a formula that adjusts the commission according to the profitability of the reinsurance agreement.

Question 25

Occurrence-based policy vs claims-made policy - casualty XOL

Answer 25

Occurrence-based - happened during policy term but can be reported at any time.
Claims-made - occurrence doesn’t matter, claims is made during the policy period or any extended reporting period.

Question 26

Retroactive date

Answer 26

The date on or after which the injury, damage, or other insured event must occur in order to be covered in a claims-made liability policy.

Question 27

Prior acts coverage

Answer 27

An extension of coverage for claims that would otherwise not be covered because they occurred prior to the retroactive date of the current claims-made policy and are not covered by the prior claims-made policy.

Question 28

Extended reporting period (ERP)

Answer 28

An additional period (also called a “tail”) following the expiration of a claims-made policy, during which the expired policy will cover claims first made for injury or damage that occurred on or after the policy’s retroactive date (if any) and before policy expiration.

Question 29

Clash cover

Answer 29

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.

Question 30

Sunset clause

Answer 30

The sunset clause limits the time after the treaty’s expiration that occurrences can be reported to the reinsurer. The time limit negotiated may be a period of months or years, typically 5 years.

Question 31

Sunrise clause

Answer 31

The reinsurer can either charge for a coverage extension or add wording to a new treaty to cover losses not covered because of a sunset clause in a previous treaty.

Question 32

Commutation Clause

Answer 32

A commutation clause allows the primary insurer and reinsurer to close out liability for claims after a stated time period from the treaty’s expiration. It allows the reinsurer to determine its ultimate loss costs within a shorter period than if claims were allowed to develop over several years.

Question 33

Occupational disease coverage

Answer 33

When workers compensation policies are reinsured, the occurrence definition should address occupational disease and specify whether the loss for each affected employee is considered a separate occurrence or whether the combined losses for all affected employees are considered one occurrence.

Question 34

Products and completed operations coverage

Answer 34

The primary insurer may define one occurrence as the accumulation of all injury or damage that results from a single cause of loss, occurs during a policy period, and affects the same insured. This definition assumes that the single cause of loss resulted from an error in manufacturing the product or performing the operation that caused injury or damage. The injury or damage may occur at any time after the single act that created the bodily injury or property damage.

Question 35

Other losses - casualty XOL

Answer 35

The definition of occurrence for coverage, other than for products and completed operations or occupational diseases, may allow the primary insurer to accumulate all of an insured’s losses for injury or damage that occur during a continuous 12-month period and claim them as one occurrence. This definition allows the primary insurer and reinsurer to avoid arguments about the number of occurrences.

Question 36

Net retained lines clause

Answer 36

The net retained lines clause specifies that the reinsurance coverage applies only to the primary insurer’s net retention. It also specifies a pattern of inuring coverages that can be helpful during the treaty’s negotiation.

Question 37

ECO & XPL difference

Answer 37

Different co-participation percentage - the ECO may be higher.

Question 38

Instead of inserting exclusions clauses in a reinsurance contract what may a reinsurer generally request an insurer to do?

Answer 38

Exclude that particular coverage in its primary policies.

Question 39

Ultimate purpose of the errors and omissions clause

Answer 39

Prevent the loss of valuable reinsurance coverage.

Question 40

Where is the hours definition/clause found?

Answer 40

Loss occurrence clause

Question 41

2 things the liability of the reinsurer clause in a surplus share reinsurance treaty does?

Answer 41

Establishes when and on what basis the reinsurer assumes liability for loss exposures ceded to it.

Question 42

What is given as a good estimate of the percentage of the insurer’s excess policy limits reinsurers will allow for them to cover, that can also be a negotiating point, and depends on market conditions?

Answer 42

80-90%

Question 43

Why may a reinsurer be concerned about a cut through endorsement being added to a policy?

Answer 43

The endorsement in combination with the policy’s insolvency clause could require the reinsurer to pay twice for a loss.

Question 44

Special termination clause/sudden death option

Answer 44

Allows either party to terminate a contract if certain factors are met. Eg change in the primary insurer’s financial standing, change of ownership, low retention of its policies.

Question 45

Access to records clause

Answer 45

Formalizes the scope of information a reinsurer has a right to access, which individuals have the right to access it, and when and where the information can be accessed.

Question 46

Arbitration Clause

Answer 46

Establishes the procedure for resolving disputes between parties to a contract outside of the judicial system. Each party appoints one arbitrator to deliberate the dispute with another arbitrator, who acts as a judge during the arbitration process. The decision of any two arbitrators is binding.

Question 47

Insolvency Clause summary

Answer 47

Reinsurer will adhere to the reinsurance obligations even if the primary insurer becomes insolvent. Required in most states, the clause commits reinsurers to paying the state insurance department liquidator the same amount that they would otherwise have paid the primary insurer.

Question 48

Insolvency clause addresses what reinsurer’s rights

Answer 48

Rights to defend and investigate a claim, as well as its rights to reimbursement for the expenses occurred while doing so.

Question 49

Errors and omissions clause

Answer 49

Ensures that mistakes, such as failing to cede loss exposures that should have been ceded or ceding loss exposures that do not fall within the reinsurance treaty’s scope, will not void the treaty as long as these mistakes are corrected when discovered.

Question 50

Why is the access to records clause so important before a renewal, especially if the insurer’s underwriting has changed recently.

Answer 50

To ensure that the business being ceded is appropriate based on the terms of the contract.

Question 51

What happens once all reinsurers have mutually signed?

Answer 51

The reinsurers are permanently bound to the reinsurance contract.

Question 52

What do individual I&Ls to multiple reinsurers NOT give them.

Answer 52

Joint liability - each reinsurer is only liable for their signed share, known as several liability.

Question 53

Liability of the reinsurer clause

Answer 53

The liability of the reinsurer clause specifies when the reinsurer assumes liability for the loss exposures ceded to it and on what basis.

Question 54

Offset clause - broad & narrow

Answer 54

An offset clause allows an insurer and reinsurer to cancel out balances owed to one another. Offsets can apply to premium and losses between the same parties within a single treaty (narrow offset) or across multiple treaties (broad offset).

Question 55

The pattern of inuring reinsurance can start with a ground-up loss. The ground-up loss is?

Answer 55

The total amount of a loss that is covered by an underlying insurance policy.

Question 56

The responsibility of documentation mostly falls on who?

Answer 56

Intermediary

Question 57

What is an I&L?

Answer 57

The ILA is a separate agreement, attached to and forming part of a reinsurance treaty. ILAs are common when multiple reinsurers participate in a treaty.

Question 58

Special acceptance agreement

Answer 58

Allows the lead reinsurer to approve the special acceptance on behalf of all, simplifying the process of securing exceptions to the treaty exclusions.

Question 59

Extended expiration provision

Answer 59

Provides that if the treaty expires while a loss occurrence is in progress, the reinsurer will indemnify the primary insurer as if the entire loss occurrence happened during the treaty’s term.

Question 60

Factors that the primary intermediary and correspondent broker must account for

Answer 60

Time zone changes, deadlines, program objectives, potential non-concurrency or coverage gaps.

Question 61

Business-covered clause - 3 things

Answer 61

The contract’s definition of policies, the policies covered, and the basis of attachment.

Question 62

Excess of Policy Limits Clause

Answer 62

The excess of policy limits (XPL) clause requires the reinsurer to indemnify the primary insurer for losses in excess of policy limits. These are damages awarded to the insured because of the primary insurer’s failure to settle a third-party claim against the insured by reason of bad faith, fraud, or gross negligence. The primary insurer is liable for these damages, which are for losses that would have been covered under the policy had the policy limits been appropriate.

Question 63

Excess of policy limits coverage & types of damage

Answer 63

The XPL clause is usually used in reinsurance treaties that cover liability and property loss exposures that have bailee liability exposures. XPL clauses may limit the scope of the reinsurance coverage provided by specifically stating that only compensatory damages—not punitive damages—are covered.

Question 64

Extra-Contractual Obligations Clause

Answer 64

The extra-contractual obligations (ECO) clause requires a reinsurer to indemnify the primary insurer for extra-contractual damages awarded against the primary insurer because of bad faith, fraud, or gross negligence in handling a claim.

Question 65

Pools, Associations, and Syndicates Exclusion Clause

Answer 65

Excludes from coverage any liability emanating from the primary insurer’s participation, directly or indirectly, through pools, associations, and syndicates. Reinsurers already participate in many pools either as members or as reinsurers, and therefore this exclusion is necessary to control their accumulation of pool liabilities.

Question 66

Total Insured Value Exclusion Clause

Answer 66

Excludes very large loss exposures from automatic coverage. Large loss exposures are defined as those needing amounts of insurance that exceed a specified amount, such as all loss exposures for which the total amount of insurance exceeds $250 million. Loss exposures needing significant amounts of insurance are sometimes insured in reinsurance transactions involving several primary insurers

Question 67

Reinstatement clause

Answer 67

The reinstatement clause provides for the automatic reinstatement of the per occurrence limit as long as the contract year limit has not been exceeded during the contract year, for additional premium.

Question 68

What does an I&L (ILA) include?

Answer 68

Identifies the treaty to which it applies
Identifies parties to the applicable treaty
States the percentage of participation for individual reinsurers
Establishes that several liability, not joint liability, applies to each reinsurer
States an effective date
Provides for proper execution by authorized officers of the primary insurer and each reinsurer

Question 69

What does the cut-through endorsement offer the primary insurer?

Answer 69

The cut-through endorsement serves to bolster the insurer’s financial strength in the eyes of third parties, such as banks and mortgagees.

Question 70

What errors/omissions does the E&O not typically cover?

Answer 70

Those caused by their computer systems.

Question 71

XPL clause impact on limits?

Answer 71

Its inclusion does not generally change the reinsurance treaty limits. However, in anticipation of higher-than-normal limits needed for losses in excess of policy limits, some pro rata treaties increase the treaty limits for these losses.

Question 72

Hours clause - typical hours?

Answer 72

Fire - 168 hours, wind - 72 hours.