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.
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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.
