Blanchard - Basic Reinsurance Accounting Flashcards

1
Q

Identify some of the functions of reinsurance. (1-3)

A

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

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2
Q

Identify some of the functions of reinsurance. (4-6)

A

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

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3
Q

What is a ‘ commutation agreement’ (in the context of reinsurance)?

A

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

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4
Q

Advantages of (or reasons for) commutation - from the reinsurer’s point-of-view. (4)

A
  • increases STABILITY for long-tailed lines
  • decreases claims expenses
  • decreases U/W leverage
  • to exit the market quickly
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5
Q

Advantages of (or reasons for) commutation - from the primary insurer’s point-of-view. (5)

A
  • remove reinsurance CREDIT risk
  • insurer receives benefit of favourable LOSS development
  • decreases EXPENSE costs
  • more EFFICIENT claims handling
  • receives immediate Cash Flow
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6
Q

Disadvantages of commutation - from the primary insurer point-of-view. (2)

A
  • risk of adverse development on claims

- capital required goes up (to support increased liabilities)

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