Blanchard - Basic Reinsurance Accounting Flashcards
Identify some of the functions of reinsurance. (1-3)
CATASTROPHE protection - a very large loss will be mostly absorbed by reinsurance
STABILIZE loss experience - reinsurance cuts the right tail off the loss distribution
WITHDRAWAL from market is facilitated - off-loading risk to reinsurance is quicker than runoff
Identify some of the functions of reinsurance. (4-6)
INCREASE large-line capacity - but minimize associated risk
GUIDANCE from reinsurer - with expertise in U/W & pricing for that particular line
SURPLUS relief - reinsurance reduces net leverage ratio
What is a ‘ commutation agreement’ (in the context of reinsurance)?
An AGREEMENT between ceding insurer and the reinsurer that PROVIDES for the valuation, payment and complete discharge of ALL OBLIGATIONS between the parties under a particular reinsurance contract.
- the reinsurer gives the ceded claims BACK to the original insurer
Advantages of (or reasons for) commutation - from the reinsurer’s point-of-view. (4)
- increases STABILITY for long-tailed lines
- decreases claims expenses
- decreases U/W leverage
- to exit the market quickly
Advantages of (or reasons for) commutation - from the primary insurer’s point-of-view. (5)
- remove reinsurance CREDIT risk
- insurer receives benefit of favourable LOSS development
- decreases EXPENSE costs
- more EFFICIENT claims handling
- receives immediate Cash Flow
Disadvantages of commutation - from the primary insurer point-of-view. (2)
- risk of adverse development on claims
- capital required goes up (to support increased liabilities)