C3 - B Flashcards
What does the term ‘facultative’ imply in the context of reinsurance?
It means ‘optional’ or ‘not compulsory’
This concept indicates that the insurer has a choice in purchasing reinsurance.
What is the primary purpose of facultative reinsurance?
To transfer risk or protect against one specific risk
It only responds to situations where the original insurer has a claim on that particular risk.
How does facultative reinsurance differ from other types of reinsurance?
Facultative reinsurance protects individual risks, while other types protect groups of risks
Grouped reinsurances cover whole sections of the insurer’s portfolio, such as hull or property accounts.
What is meant by ‘accounts’ in the context of insurance?
All risks coded or allocated to a particular class of business
Examples include the ‘hull account’ or ‘property account’.
When might an insurer choose to buy facultative reinsurance?
When wanting to protect a risk that falls outside the group definition
This is particularly relevant for unusual risks that do not fit into grouped types of reinsurance.
Fill in the blank: Facultative reinsurance responds to _______.
one risk
It is distinct in that it does not cover multiple risks as grouped reinsurances do.
What is a characteristic of fac reinsurance in terms of administration?
It is inherently more time-consuming administratively because risks are placed individually.
This results in a potential for higher costs compared to other types of reinsurance.
Why does the original insurer need to consider the balance when using fac reinsurance?
They must balance the ‘safety net’ of the reinsurance, the price it has to pay for it, and the price it can charge for the business.
This careful consideration is crucial to avoid financial losses.
What happens if the reinsurance is too expensive?
The risk loses money even before any claims are made.
This emphasizes the importance of pricing in reinsurance agreements.
How is fac reinsurance treated from a practical perspective?
It is treated much like direct insurance with a premium paid at the beginning of the contract.
Claims are presented to the reinsurer similar to direct claims, supported by claims information.
What is facultative obligatory reinsurance?
A variation on facultative reinsurance where the insurer has the choice to cede individual risks to the reinsurer under pre-agreed criteria.
This means that while the insurer can opt for reinsurance, the reinsurer must accept the risk if ceded.
In facultative obligatory reinsurance, what is the ‘obligatory’ element?
The reinsurer is obligated to accept the risk if the insurer decides to cede it.
This creates a potential imbalance between the insurer and reinsurer
What does ‘better quality’ risks mean in the context of facultative obligatory reinsurance?
‘Better quality’ risks are those that are less likely to have claims.
Insurers may choose to retain these good risks while ceding poorer risks to the reinsurer.
.
What potential issue arises from the insurer’s ability to choose risks in facultative obligatory reinsurance?
Anti-selection against the reinsurer, as the insurer may cede less favorable risks.
This can lead to a higher likelihood of claims for the reinsurer.
What is a key requirement for facultative obligatory reinsurance to operate effectively?
A strong element of trust between the insurer and reinsurer.
Trust is essential for both parties to feel secure in their agreement.
Why might a reinsurer consider entering a facultative obligatory reinsurance contract?
If they have a long-standing business relationship with the insurer.
Is facultative obligatory reinsurance commonly used today?
No, it is not seen very much anymore.
There is more emphasis on equally balanced treaty types in contemporary practice.
What is Excess of loss (XL) reinsurance?
A type of non-proportional reinsurance where there is no sharing of premium and claims in proportions.
Why is Excess of loss (XL) reinsurance considered non-proportional?
Because there is no concept of sharing the premium and the claims in proportions or percentages.
How is coverage structured in Excess of loss (XL) reinsurance?
Coverage is bought/sold in layers of any size to build a reinsurance programme.
What should an insurer consider when deciding how many layers to buy?
Potential claim size and analysis of previous years’ claims histories.
What type of claims data should insurers analyze for XL reinsurance?
Claims data for spikes, particularly large claims that were unusual and unlikely to happen again.
True or False: In XL reinsurance, the layers extend downwards.
False
What should an insurer do if they find spikes in claims data?
Consider whether to ignore them when determining the right level of reinsurance for the coming year.
What is a key question to consider regarding claims history in XL reinsurance?
What does the previous claims history show the general highest point to be?
Fill in the blank: The optimum combination of layers and sizes of layers is crucial for _______.
[determining the right level of reinsurance]
What factors does a reinsurer consider when determining the premium payable?
The policy limit and the frequency of claims
The reinsurer assesses how often the layer might have to pay claims, with lower layers being more likely to have claims than higher layers.
What are the two types of layers in a reinsurance programme?
Working layers and catastrophe layers
The lower layers are referred to as working layers, while the higher layers are known as catastrophe layers.
Why do higher layers typically charge less premium for the same policy limit?
The likelihood of a claim is theoretically less
Larger claims are less frequent than smaller claims, resulting in lower premiums for higher layers
.
How is the basic premium for reinsurance calculated?
Using the same concepts as direct insurance
The basic premium does not particularly relate to the amount of inwards premium that the insurer receives.
What basis is often used to show the premium for non-proportional reinsurance?
Adjustable basis
The reinsurer’s calculation of the price is based on the cedant’s overall gross premium income.
What does the cedant pay at the start of the year for non-proportional reinsurance?
A small upfront amount known as the Deposit premium
This amount is paid with an agreement to review the figures at the end of the year.
What is stated in the contract regarding the premium payment?
‘Premium US$100,000 adjustable at 5% original gross premium income (OGPI)’
This indicates the initial payment and the adjustment based on actual premium income at year-end.
What is the danger associated with Excess of loss (XL) reinsurance?
An insurer can ‘burn through’ all its layers from zero and be left exposed.
What does reinstatement in reinsurance allow an insurer to do?
It allows the insurer to collect more than one total loss during any one year.
What might reinsurers charge for reinstatement?
A proportion of the original premium.
How is the additional reinstatement premium calculated?
It is calculated when the claim is presented for settlement.
What is the term for an insurance policy that allows for unlimited reinstatements?
Unlimited reinstatements.
Are unlimited reinstatements common in reinsurance policies?
No, very few policies allow for unlimited reinstatements.
What is the typical cap on reinstatements in most reinsurance policies?
Most are capped at four reinstatements.
How many total losses can be paid if a policy allows for four reinstatements?
A maximum of five total losses can be paid.
What is an XL contract?
A reinsurance contract that can cover more than one risk or a whole portfolio of risks.
What are the common groupings for excess of loss contracts?
- Single classes of business
- Single risk
- All marine accounts
- Whole account
What does ‘single risk’ refer to in excess of loss contracts?
Contracts where claims can only be grouped coming out of one risk written.
What does ‘whole account’ mean in the context of excess of loss reinsurance?
It means every risk that the insurer writes is covered.
Why is it important for insurers to group claims together?
It allows them to make a larger claim on the reinsurers and pay the first layer only once.
What should the insured consider when handling claims on reinsurance policies?
Whether claims from any one incident can be grouped together for presentation to reinsurers.
True or False: Reinsurance policy wordings usually allow claims arising from any one event to be grouped together.
True
What are reinsurers watchful for regarding claim grouping?
Abuses of the grouping or possible adverse aggregations of claims.
What is a ‘collecting note’ in reinsurance?
A document that sets out details of the event and indicates its financial loss.
What might a reinsurer require if they suspect a ‘rogue claim’?
They might need a detailed breakdown of the claim.
How does a non-proportional reinsurance contract with reinstatement provisions work?
It functions similarly to an aggregate policy limit.
What must be analyzed when considering claims on a reinsurance contract?
The financial position across the whole contract.
What are reinstatement premiums?
Premiums paid each time a claim is presented until the contract is used up.
If a claim of US$500,000 is presented, what portion of the reinstatement premium is activated?
50% of the second ‘life’ premium.
What is stop loss reinsurance?
A variation of excess of loss policy linked to an insurer’s combined ratio.
What does a combined ratio indicate?
The percentage of premium income represented by claims and operating costs.
If an insurer has £1m of premium and claims plus operating costs of £800,000, what is the combined ratio?
80%.
What is the significance of a combined ratio higher than 100%?
It indicates that claims and operating expenses exceed premium income, resulting in a loss.
What triggers stop loss reinsurance?
When an insurer’s combined ratio exceeds a stated point.
Fill in the blank: Reinstatement premiums do not trigger any payment of _______ to the broker.
brokerage.
What is proportional reinsurance?
A type of reinsurance that shows a clear relationship between the premium that the original insurer receives and the amount passed to reinsurers.
Name the two standard proportional reinsurance contracts.
- Quota share treaty
- Surplus treaty
What is a quota share treaty?
An agreement between an insurer and reinsurer where for every risk accepted, the insurer cedes an agreed proportion of the premium to the reinsurer.
In a quota share treaty, what does the term ‘line’ refer to?
The share of the risk that the insurer will retain itself.
If an insurer accepts a 10% line on a risk, how much can it transfer to a reinsurer in a 30% quota share?
30% of that 10%.
True or False: In a quota share treaty, the reinsurer receives every risk that falls within the criteria.
True
What is the reinsurance called if the reinsurer receives 30% of the premium in a quota share treaty?
30% quota share.
What does a 100% quota share arrangement imply?
It is a ‘fronting’ arrangement where the insurer acts as a local face in a market and keeps none of the risk.
Fill in the blank: In a quota share treaty, there is no limit to the extent of the percentage that can be shared with the _______.
[reinsurer]
Can the size of risk being ceded under a quota share treaty be restricted?
Yes.
What is a surplus treaty or surplus line treaty?
A type of reinsurance where the original insurer buys reinsurance in ‘lines’ that match the maximum lines they can accept on any one risk.
What do underwriters within an insurer have that determines how much risk they can accept?
A ‘maximum retained line’.
What does a surplus line treaty allow underwriters to do?
Increase their permitted line in multipliers of the original line.
In a surplus line treaty, what must an underwriter do after buying reinsurance?
Share out their premium with the reinsurers in proportions.
Fill in the blank: The surplus line treaty gives underwriters the flexibility to write any line up to _______.
£30m.
When an underwriter writes a risk eligible for cession to a surplus line treaty, what do they have to do?
Share their premium with reinsurers.
What is the maximum factor by which an underwriter can increase their original line in the given example?
Five times.
If an underwriter takes a line of £15m, what must they do with their premium?
Share it with the reinsurers in proportions.
