Ch 10

Question 0

The transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium, to indemnify another insurer (the primary insurer) for some or all of the financial consequences of certain loss exposures covered by the primary’s insurance policies.

Answer 0

Reinsurance

Question 1

The insurer that assumes some or all of the potential costs of insured loss exposures of the primary insurer in a reinsurance contractual agreement.

Answer 1

Reinsurer

Question 2

In reinsurance, the insurer that transfers or cedes all or part if the insurance risk it has assumed to another insurer in a contractual arrangement.

Answer 2

Primary insurer.

Question 3

Contract between the primary insurer and reinsurer that stipulates the form of reinsurance and the type of accounts to be reinsured.

Answer 3

Reinsurance agreement

Question 4

Uncertainty about the adequacy of insurance premiums to pay losses.

Answer 4

Insurance risk

Question 5

The amount retained by the primary insurer in the reinsurance transaction.

Answer 5

Retention

Question 6

The consideration paid by the primary insurer to the reinsurer for assuming some or all of the primary insurer’s insurance risk.

Answer 6

Reinsurance premium

Question 7

An amount paid by the reinsurer to the primary insurer to cover part or all of the primary insurer’s policy acquisition expenses.

Answer 7

Ceding commission

Question 8

A reinsurance agreement whereby one reinsurer (the retrocedent) transfers or cedes all or part of the insurance risk it has assumed to another reinsurer.

Answer 8

Retrocession

Question 9

The reinsurer that assumes all or part of the reinsurance risk accepted by another reinsurer.

Answer 9

Retrocessionaire

Question 10

The reinsurer that transfers or cedes all or part of the insurance risk it has assumed to another reinsurer.

Answer 10

Retrocedent

Question 11

List the Six Principal Functions of Reinsurance

Answer 11

1. Increase Large Line Capacity
2. Provide Catastrophe Protection
3. Stabilize Loss Experience
4. Provide Surplus Relief
5. Facilitate Withdrawal from a Market Segment
6. Provide Underwriting Guidance

Question 12

An insurer’s ability to provide larger amounts of insurance for property loss exposures, or higher limits of liability for liability loss exposures, than it is otherwise willing to provide.

Answer 12

Large-line capacity

Question 13

The maximum amount of insurance or limit of liability that an insurer will accept on a single loss exposure.

Answer 13

Line

Question 14

Which influences are the maximum amount of insurance (line) subject to.

Answer 14

• maximum amount of insurance allowed by insurance regulations (can’t retain more than 10% of surplus in one risk)
• Size of potential loss(es) that can be retained without impairing earnings or surplus.
• specific characteristics of a loss exposure
• amount, types, cost of reinsurance.

Question 16

An insurer whose primary business purpose is serving other insurers’ reinsurance needs.

Answer 16

Professional reinsurer

Question 17

A professional reinsurer whose employees deal directly with primary insurers.

Answer 17

Direct writer reinsurer

Question 18

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.

Answer 18

Reinsurance intermediary

Question 19

What are the three sources of reinsurance.

Answer 19

1) professional reinsurers
2) reinsurance departments of primary insurers
3) reinsurance pools, syndicates, and associations

Question 20

Who do professional reinsurers evaluate the primary insurer before entering into a reinsurance agreement?

Answer 20

The treaty reinsurer underwrites the primary insurer and the loss exposures being ceded.

Question 21

What do reinsurers look at when evaluating a primary insurer?

Answer 21

Financial statements, info from financial rating services, info from insurance department, insurers experience, reputation, and management.

Question 22

Groups of insurers that share the loss exposures of the group, usually through reinsurance.

Answer 22

Reinsurance pools, syndicates and associations

Question 23

A reinsurance association that consists of several unrelated insurers or reinsurers that have joined to insure risks the individual members are unwilling to individually insure.

Answer 23

Reinsurance pool

Question 24

A group of insurers or reinsurers involved in joint underwriting to insure major risks that are beyond the capacity of a single insurer or reinsurer; each syndicate member accepts predetermined shares of premiums, losses, expenses and profits.

Answer 24

Syndicate

Question 25

An organization of member companies that reinsure by fixed percentage the total amount of insurance appearing on policies issued by the organization.

Answer 25

Association

Question 26

Founded in 1967. Composed of intermediaries and reinsurers thy broker or assume non-life treaty reinsurance. Also conduct claim seminars and publish a magazine.

Answer 26

Intermediaries and Reinsurance Underwriters Association (IRU)

Question 27

Represents intermediaries and reinsurers that are primarily engages in US treaty reinsurance business obtained through reinsurance brokers.

They identify and address industry-wide operational issues and are described as a forum for treaty reinsurance professionals.

Big importance; contract wording (publish contract wording reference book)

Answer 27

Brokers & Reinsurance Markets Association

Question 28

Headquartered in DC, a non-profit trade association of professional reinsurers and intermediaries. All members at US companies or US branches of international reinsurers.

Activities: provide into to interested parties outside the industry, member advocacy and lobbying, aggregate data, conduct seminars

Answer 28

Reinsurance Association of America (RAA)

Question 29

This type of reinsurance uses one agreement for an entire class or portfolio of loss exposure. Also known as obligatory reinsurance.

Answer 29

Treaty reinsurance

Question 30

This form of reinsurance uses a separate agreement or each loss exposure it wants to reinsure.

Answer 30

Facultative (or non-obligatory)

Question 31

The foundation of most reinsurance programs.

Answer 31

Treaty reinsurance

Question 32

T or F: Most, but not all, treaty reinsurance agreements allow a primary insurer to pick and choose which exposures they want to reinsure.

Answer 32

F. Most require the primary insurer to cede all eligible loss exposures to the reinsurer.

Question 33

What would happen of primary insurers could choose which exposures to cede?

Answer 33

Adverse selection

Question 34

The decision to reinsure those loss exposures thy have an increased probability of loss because retention of those loss exposures is undesirable.

Answer 34

A adverse selection.

Question 35

Reinsurance allows the primary insurer to increase its ________ _______ while limiting the financial consequences of potential losses.

Answer 35

Market share

Question 36

Reinsurance can help an insurer stabilize loss experience. Why is stabilizing loss experience important?

Answer 36

Volatile loss experience can:

• affect stock value
• alter financial rating
• cause abrupt changes in approaches taken in managing the underwriting, claim, and marketing departments
• undermine the confidence of the sales force
• lead to insolvency (extreme cases)

Question 37

How does reinsurance stabilize loss experience?

Answer 37

Smooth peaks and valleys in an insurer’s experience curve.

Question 38

Insurers looking to stabilize loss experience can obtain reinsurance to accomplish these purposes:

Answer 38

1) Limit its liability for a single loss exposure
2) Limit its liability for several loss exposures affected by a common event.
3) limit its liability for loss exposures that aggregate claims over time

Question 39

When an insurer immediately recognizes expenses while only gradually recognizing revenue, its policyholders’ surplus will _____ as its capacity ratio increases.

Answer 39

decrease

Question 40

A replenishment of policyholders’ surplus provided by the ceding commission paid to the primary insurer by the reinsurer. An insurer will usually use reinsurance for this when rapidly expanding premium volume.

Answer 40

Surplus relief

Question 41

What is the maximum ratio of written premiums to policyholders’ surplus?

Answer 41

3 to 1

Question 42

What effect does paying ceding commissions to a reinsurer have on the insurer?

Answer 42

It replenishes surplus which facilitates the primary insurer’s premium growth and lowers its capacity ratio.

Question 43

Which three options does an insurer have when withdrawing from a market segment?

Answer 43

1) Stop writing new insurance policies and continue in-force insurance until all policies expire (“run-off”)
2) Cancel all policies (if regulations allow) and refund unearned premiums to the insured.
3) Withdraw from the market segment by buying portfolio reinsurance

Question 44

Reinsurance that transfers to the reinsurer liability for an entire type of insurance, territory or book of business after the primary insurer has issued the policies.

Answer 44

Portfolio reinsurance

Question 45

The only exception to the general rule that reinsurers do not accept all of the liability for specified loss exposures of an insurer

Answer 45

Portfolio reinsurance

Question 46

When a primary insurer purchases portfolio reinsurance, who handles the claims?

Answer 46

The primary insurer but the reinsurer is indemnified.

Question 47

An agreement under which one insurer or reinsurer is substituted for another. All responsibilities are handled by the new insurer.

Answer 47

Novation

Question 48

An agreement that defines the terms of the facultative reinsurance coverage on a specific loss exposure.

Answer 48

Facultative certificate of reinsurance

Question 49

What are the 4 functions of facultative reinsurance?

Answer 49

• large-line capacity for exposures exceeding treaty reinsurance agreements
• reduce exposure in certain geographic area
• insure loss exposure with atypical hazard characteristics while maintaining favorable loss experience of the primary insurer’s treaty reinsurance and associated profit-sharing.
• insure particular classes of loss exposures that are excluded from treaty reinsurance.

Question 50

Why is maintaining favorable treaty loss experience important?

Answer 50

The reinsurer ha underwritten and priced the treaty with certain expectations. Treaty could be terminate or price could be increased.

Question 51

Facultative insurance is usually priced to reflect the likelihood of _______ ____________.

Answer 51

Adverse selection

Question 52

Why is the expense of placing facultative reinsurance so high?

Answer 52

The primary insurer has to provide extensive information about each loss exposure.

A significant amount of time is spent on each cession. Underwriter also has to notify the reinsurer of any endorsement, loss notice, or cancellation.

Question 53

What are the two hybrids of treaty and facultative reinsurance?

Answer 53

Facultative treaty: agree an how subsequent facultative submissions will be handled. Used when there aren’t enough exposures for treaty.

Facultative obligatory treaty: primary insurer has option of ceding loss exposures. The reinsurer has to accept all exposures.

Question 54

A ceding commission that is a fixed percentage of the ceded premiums.

Answer 54

Flat commission

Question 55

A ceding commission that is contingent on the reinsurer realizing a predetermined percentage of excess profit on ceded loss exposures.

Answer 55

Profit-sharing commission

Question 56

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

Answer 56

Sliding scale commission.

Question 57

A type of pro rata reinsurance in which the primary insurer and the reinsurer share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) using a fixed percentage.

Answer 57

Quota share reinsurance

Question 58

What is the distinguishing characteristic of quota share reinsurance?

Answer 58

It uses a fixed percentage in sharing amounts of insurance, policy premiums, and losses.

Question 59

A treaty in which the primary insurer retains 45% would be called a ___% quota hate treaty.

Answer 59

55%

Question 60

Most reinsurance agreements specify a _____ _______ limit and some include a ___ ___________ limit.

Answer 60

Maximum dollar / per occurrence

Question 61

A type of excess of loss reinsurance that protects the primary insurer from an accumulation of retained losses that arise from a single catastrophic event.

Answer 61

Catastrophe excess of loss reinsurance

Question 62

What is one of the downfalls of quota share reinsurance?

Answer 62

Policies with good risks and low amounts of insurance that would normally be retained have to be reinsured.

Question 63

Why aren’t insurers subject to adverse selection with quota share reinsurance?

Answer 63

The primary insurer and reinsurer share liability for every loss exposure subject to the quota share treaty.

Question 64

A type of quota share treaty that allows a primary insurer to retain a larger proportion of the small loss exposures within its financial capacity, while maintaining a safer and smaller retention on larger loss exposures.

Answer 64

Variable quote share treaty

Question 65

A type of pro rata reinsurance in which the policies covered are those whose amount of insurance exceeds a stipulated dollar amount, or line. Usually only used with property insurance.

Answer 65

Surplus share reinsurance

Question 66

What is the distinguishing feature of surplus share reinsurance?

Answer 66

When an underlying policy’s total amount of insurance exceeds a stipulated dollar amount, or line, the reinsurer assumes the surplus share of the amount of insurance.

Question 67

Provide a simple explanation and example of surplus share reinsurance.

Answer 67

The reinsurer covers the difference between the written limit and the amount the primary insurer wants to retain. In return, the primary insurer pays the reinsurer the proportion of premium that corresponds to the proportion of coverage reinsured.

Ex. $1MM home. Primary insurer wants to cede $750k, Annual premium of $2,000. Primary insurer keeps $500 and reinsurer gets $1500.

Question 68

How is a reinsurance limit set in a surplus share reinsurance contract?

Answer 68

The reinsurance limit is expressed in multiples of the primary insurer’s line. Ex. a nine-line surplus treat insures loss exposures that exceed its retention by a multiple of nine.

Ex. $300,000 line for a nine-line treaty. Primary insurer has retains $300,000 and reinsurer covers from $300,000 to $2.7 million ($300k x9)

Question 69

Why are surplus share treaties more costly go administer than quota share treaties?

Answer 69

The percentage of policy premiums and losses vary for each loss exposures ceded. Insurer has to reporter to reinsurer (bordereau)

Question 70

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

Answer 70

Bordereau

Question 71

A document that provides the minimum and maximum line a primary insurer can retain on a loss exposure.

Answer 71

Line guide

Question 72

A type of reinsurance in which the primary insurer is indemnified for losses that exceed a specified dollar amount.

Answer 72

Excess of loss reinsurance (nonproportional reinsurance)

Question 73

The dollar amount above which the reinsurer responds to losses.

Answer 73

Attachment point

Question 74

Excess of loss premiums are negotiated based on the likelihood that losses will exceed the ______ ______. It is not proportional unlike quota share and surplus share.

Answer 74

Attachment point

Question 75

The premium the primary insurer charges on its underlying policies and to which a rate is applied to determine the reinsurance premium.

Answer 75

Subject premium

Question 76

An excess of loss reinsurance agreement with a low attachment point.

Answer 76

Working cover

Question 77

When is a working cover typically used?

Answer 77

When an insurer expects an unprofitable year but expects good years to offset bad ones.

When selling a new type of insurance they have little experience with.

Question 78

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

Answer 78

Co-participation provision

Question 79

What is the purpose of a co-participation provision on an excess of loss reinsurance treaty?

Answer 79

Provide the primary insurer with a financial incentive to efficiently manage losses that exceed the attachment point.

Question 80

What are the two most common ways of handling loss adjustment expenses in an excess of loss reinsurance treaty?

Answer 80

• prorate LAE between reinsurer and primary insurer based on same percentage share each is responsible for the loss. (“Pro rata in addition”)
• add LAE to the amount of loss when applying the attachment point of the excess of loss reinsurance agreement. (“LAE included in the limit”). This is usually how liability insurance with high litigation costs works.

Question 81

What are the five types of excess of loss reinsurance?

Answer 81

1) per risk
2) catastrophe
3) per policy
4) per occurrence
5) aggregate

Question 82

A type of excess of loss reinsurance that covers property insurance and that applies separately to each loss occurring to each risk.

Answer 82

Per risk excess of loss reinsurance

Question 83

True or false, per occurrence limits are commonly include with per risk excess of loss reinsurance agreements?

Answer 83

True

Question 84

Why is catastrophe excess of loss reinsurance usually purchased with per risk?

Answer 84

If there is a catastrophe, numerous risks could be total losses and there is limit what the reinsurer pays on each risk.

Question 85

Excess of loss reinsurance which protects the primary insurer from an accumulation of retained losses that arise from a single catastrophic event. O

Answer 85

Catastrophe excess of loss.

Question 86

How are the attachment points stated with catastrophe excess of loss?

Answer 86

Dollar amounts of loss.

Question 87

A reinsurance agreement clause that defines the scope of a catastrophic occurrence for the purposes of the agreement. The scope is usually a time period.

Answer 87

Loss occurrence clause

Question 88

What happens to policy limits after a reinsurer pays the primary insurer for catastrophe losses?

Answer 88

Coverage limits for future losses is reduced unless the primary insurer pays additional premium to reinstate the coverage.

Question 89

A type of excess of loss reinsurance that applies the attachment point and the reinsurance limit separately to each insurance policy issued by the primary insurer regardless of the number of losses occurring under each policy.

Answer 89

Per policy excess of loss reinsurance

Question 90

A type of excess of loss reinsurance that applies the attachment point and reinsurance limit to the total losses arising from a single event affecting one or more of the primary insurer’s policies.

Answer 90

Per occurrence excess reinsurance

Question 91

Which line of business are per policy and per occurrence excess of loss reinsurance usually used with?

Answer 91

Liability Insurance.

Question 92

Explain how per occurrence excess of loss woks.

Answer 92

Covers an occurrence. If the total of losses exceed the retention, reinsurance is attached.

Question 93

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.

Answer 93

Clash cover

Question 94

Explain how a clash cover works

Answer 94

If a loss occurs that results in loss to multiple exposures, the normal retention for an occurrence first applies, then the reinsurer covers the remainder up to their limit. After the limit is exhausted, the primary insurer retains loss up to the retention set for the clash cover. Then the reinsurer takes over up to their limit.

Question 95

What is a clash cover useful for?

Answer 95

Types of liability insurance in which loss adjustment expenses are likely to be high and underlying per occurrence reinsurance limits include these exposures rather than prorate them. (professional liability, medical malpractice, d&o). Also good for extracontractual damages

Question 96

Damages awarded to the insured as a result of the insurer’s improperly handling a claim.

Answer 96

Extracontractual damages.

Question 97

A loss that results when an insured sues an insurer for failing to settle a claim within the insured’s policy limits when the insurer had the opportunity to do so.

Answer 97

Excess of policy limits loss

Question 98

Type of excess of loss reinsurance that covers aggregated losses (over a specified period) that exceed the attachment point, stated as a dollar amount of loss or as a loss ratio, and that occur over a specified period, usually one year.(used for property and liability)

Answer 98

Aggregate excess of loss reinsurance

Question 99

How is the attachment point of a Aggregate excess of loss reinsurance treaty set?

Answer 99

As either a dollar amount of loss or as a loss ratio.There is also usually a 5-10% co-participation provision.

Question 100

Aggregate excess of loss reinsurance with an loss ratio attachment point. If a primary insurer retains 90%, the reinsurer may retain 91%-120% (30% xs 90$). The primary insurer is responsible for losses above 120%

Answer 100

stop loss reinsurance

Question 101

A nontraditional type of reinsurance in which the reinsurer’s liability is limited and anticipated investment income is expressly acknowledged as an underwriting component. It is used to cover exposures that were tradition

Answer 101

Finite risk reinsurance (financial reinsurance)

Question 102

What is a typical policy term for finite risk reinsurance?

Answer 102

3-5 years

Question 103

Finmite risk reinsurance premiums can be a _______ percentage of the reinsurance limit.

Answer 103

substantial

Question 104

Generally, finite risk reinsurance is designed to cover ___-severity losses.

Answer 104

High

Question 105

A financial market in which long-term securities are traded.

Answer 105

Capital market

Question 106

The use of securities or financial instruments (for example, stocks, bonds, commodities, financial futures) to finance an insurer’s exposure to catastrophic loss.

Answer 106

Securitization of risk

Question 107

A facility established for the purpose of purchasing income-producing assets from an organization, holding title to them, and then using those assets to collateralize securities that will be sold to investors.

Answer 107

Special purpose vehicle (SPV)

Question 108

Financial contract whose value is based on the level of insurable losses that occur during a specific time period.

Answer 108

Insurance derivative

Question 109

An agreement, entered into before any losses occur, that enables an organization to raise cash by selling stock or issuing debt at prearranged terms after a loss occurs that exceeds a certain threshold.

Answer 109

Contingent capital arrangement

Question 110

A financial instrument whose value is primarily driven by insurance and/or reinsurance loss events.

Answer 110

Insurance-linked security

Question 111

A type of insurance-linked security that is specifically designed to transfer insurable catastropher risk to investors.

Answer 111

Catastrophe bond.

Question 112

A means through which a primary insurer can exchange a portion of its insurance risk for another insurer’s

Answer 112

catastrophe risk exchange

Question 113

A surplus note that has been designed so a primary insurer, at its option, can immediately obtain funds by issuing notes at a pre-agreed rate of interest. They increase primary insurer’s assets without increasing liabilities.

Answer 113

contingent surplus note

Question 114

A type of unsecured debt instrument, issued only by insurers, that has characteristics of both conventional equity and debt securities and is classified as policyholders’ surplus rather than as a liability on the insurer’s statutory balance sheet.

Answer 114

Surplus note

Question 115

The price at which the stock or commodity underlying a call option (such as a warrant) or a put option can be purchased (called) or sold (put) during a specified period.

Answer 115

Strike price

Question 116

An insurance-linked security that covers the primary insurer in the event that an industry-wide loss from a particular catastrophic event (earthquake) exceeds a predetermined threshold. Coverage is triggered by industry losses as a whole.

Answer 116

Industry Loss Warranty (ILW)

Question 117

Agreement that gives the primary insurer the right to a cash payment from investors if a specified index of catastrophe losses reaches a specified level (strike price) catastrophe loss index keeps track of losses.

Answer 117

Catastrophe option

Question 118

An arrangement in which a bank or other financial institution agrees to provide a loan to primary insurer in the event the primary insurer suffers a loss. (Like prequalifying). They have to pay a commitment fee

Answer 118

Line of credit

Question 119

Limited-existence SPV that is often an independent company that provides a primary insurer additional capacity to write property catastrophe business or other short-rail lines through a quota share agreement with private investors. Investors assume portion of risk and earn corresponding profit on primary insurer’s book or business.

Answer 119

Sidecar

Question 120

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

Answer 120

Reinsurance Program

Question 121

Factors Affecting Reinsurance Needs

Answer 121

1. Growth plans
2. Types of insurance sold
3. Geographic spread of loss exposures
4. Insurer size
5. Insurer structure
6. Insurer financial strength
7. Senior management’s risk tolerance

Question 122

Why do insurers planning to grow need reinsurance?

Answer 122

• growth drains surplus. Ceding commission replenishes.
• loss ratio of new business is less stable, especially if selling a new, unfamiliar type of insurance or in new markets.
• growth involves entering markets with greater coverage requirements. (Entering high net worth homeowners/umbrella)

Question 123

Which type of reinsurance is best for growing insurers

Answer 123

Pro rata

Question 124

Why do the types of insurance insurers sell dictate the need for reinsurance?

Answer 124

Commercial loss exposures deal with higher limits and risks are not homogeneous or stable. States require more surplus or lines such as medical malpractice. Carriers that sell more types of insurance are usually more stable and require less reinsurance.

Question 125

A measure of the loss volatility of the types of insurance sold by an insurer.

Answer 125

Underwriting Risk

Question 126

How does geographic area dictate reinsurance.

Answer 126

Insurers that are not diversified geographically need more reinsurance. Diversified insurers are less prone to catastrophe and insurance regulations and laws in certain territories.

Question 127

Stronger insurers need _____ reinsurance.

Answer 127

Less. They don’t need surplus relief and don’t need as much reinsurance to stabilize their loss ratio.

Question 128

Why does a financially strong insurer need less reinsurance?

Answer 128

1) doesn’t need unplugs relief to increase capacity

2) need less reinsurance to stabilize loss ratio

Question 129

What are the factors in selecting a retention?

Answer 129

• maximum primary insurer can retain
• maximum primary insurer wants to retain
• minimum retention sought by the insurer
• co-participation provision

Question 130

The maximum amount an insurer can retain depends on ___________ _________ and the primary insured’s _________ ________.

Answer 130

Regulatory requirements (3-1)/10% 1 exposure / financial strength

Question 131

What are the factors that affect reinsurance limit selection?

Answer 131

• max policy limit
• extra contractual obligations m-loss adjustment expenses
• clash cover
• catastrophe exposure.

Question 132

Are alien reinsurers regulated in the USA?

Answer 132

No

Question 133

What is the “nine-month-rule?”

Answer 133

It requires that reinsurance contracts be finalized, reduced to written form, and signed within nine months of the policy period’s commencement.

Question 134

Having documentation of all agreed terms of an insurance policy or reinsurance contract by the date of inception and issuing and delivering such policy or contract within thirty business days of inception of coverage.

Answer 134

Contract certainty

Question 135

What do some primary insurers have to do before they can obtain a reserve credit due to reinsurance?

Answer 135

They have to show state regulators that the contract has desirable clauses.

Question 136

A clause that is required in reinsurance agreements indicating that the primary insurer’s bankruptcy does not affect the reinsurer’s liability for losses under the reinsurance agreement.

Answer 136

Insolvency clause

Question 137

A clause that is required in reinsurance agreements indicating that the reinsurance intermediary is the reinsurer’s agent for collecting reinsurance premiums and paying reinsurance claims. (the reinsurer assumes the credit risk that the intermediary will be unable or unwilling to pay all of the premiums collected)

Answer 137

Intermediary clause

Question 138

Why is an intermediary clause beneficial to primary insurers?

Answer 138

In most cases, courts have held that the intermediary is the primary insurer’s agent. If this clause wasn’t attached, the risk of the reinsurance intermediary’s insolvency would most often fall on the primary insurer instead of the reinsurer.

Question 139

What is the difference between treaty reinsurance and facultative reinsurance?

Answer 139

Treaty: Reinsurer agrees in advance to reinsure all the loss exposures that fall within the treaty. Most reinsurers require all exposures in the terms of the treaty be reinsured.

Facultative: Primary insurer negotiates a separate agreement for each exposure.

Question 140

Why do primary insurers make treaty reinsurance agreements?

Answer 140

So underwriters do not have to exercise discretion in using reinsurance. It also protects reinsurance companies because if each risk were chosen for reinsurance there would be adverse selection.

Question 141

How are reinsurers regulated?

Answer 141

Reinsurers are required to file financial agreements with state regulatory authorities and to adhere to state insurance regulations regarding reserves, investments, and minimum capital and surplus requirements. They must also undergo periodic examination by the appropriate state authorities.

Question 142

Describe the relationship between primary insurer rates and reinsurer rates?

Answer 142

The regulation of primary insurer rates could indirectly affect reinsurance rates to the extent that the reinsurers receive a reinsurance premium based on the premiums of primary insurers. Thus regulating the primary insurer’s rates might place an effective ceiling on the amount of the primary insurer can pay for reinsurance.

Question 143

Which one of the following statements is true with regard to excess of loss reinsurance?

A. Per policy excess of loss applies primarily to property insurance, and per risk excess of loss applies primarily to liability insurance.

B. Per policy excess of loss applies to both property and liability insurance.

C. Per policy excess of loss applies primarily to liability insurance, and per risk excess of loss applies primarily to property insurance.

D. Per risk excess of loss always applies to both property and liability insurance.

Answer 143

C. Per policy excess of loss applies primarily to liability insurance, and per risk excess of loss applies primarily to property insurance

Question 144

A key characteristic that distinguishes finite risk reinsurance from other types of reinsurance is that finite risk reinsurance

A. Places a finite limit on each occurrence.

B. Includes a profit-sharing commission in addition to a flat ceding commission.

C. Applies above a finite dollar amount or line.

D. Transfers a limited amount of risk to the reinsurer.

Answer 144

D. A key characteristic that distinguishes finite risk reinsurance from other types of reinsurance is that finite risk reinsurance transfers a limited amount of risk to the reinsurer.

Question 145

Which one of the following is true regarding sidecar arrangements as an alternative to traditional and non-traditional reinsurance?

A. Sidecars are a means through which a primary insurer can exchange a portion of its insurance risk for another insurer’s insurance risk.

B. Under these arrangements, the primary insurer charges a ceding commission and may receive a profit commission if the book of business is profitable.

C. Sidecars have a strike price at which the primary insurer will be able to receive cash from its investors to enable it to pay losses from a catastrophe.
Incorrect

D. Under a sidecar arrangement, investors receive their return for the risk assumed through periodic interest payments on the principal amount assumed.

Answer 145

B. Under these arrangements, the primary insurer charges a ceding commission and may receive a profit commission if the book of business is profitable.

Question 146

Clash coverage limits should be set by considering all of the following, EXCEPT:

A. Potential for multiple primary policies to be involved in a single occurrence

B. Catastrophe excess of loss reinsurance purchased by the primary insurer

C. Potential for excess of policy limits losses

D. Policy limits offered by the primary insurer

Answer 146

B. Catastrophe excess of loss reinsurance purchased by the primary insurer
Correct

Question 147

Clash coverage limits should be set by considering all of the following, EXCEPT:

A. Potential for multiple primary policies to be involved in a single occurrence

B. Catastrophe excess of loss reinsurance purchased by the primary insurer

C. Potential for excess of policy limits losses
Incorrect

D. Policy limits offered by the primary insurer
Incorrect

Answer 147

B. Catastrophe excess of loss reinsurance purchased by the primary insurer

Question 148

Which one of the following statements is true regarding reinsurance regulation?

A. Reinsurers must comply with state regulations only with regard to their investments.

B. Reinsurance rates are regulated in the same manner as insurance rates.

C. Reinsurers must file reinsurance contract wording with state regulators..

D. Reinsurers are subject to periodic examinations by state authorities.

Answer 148

D. Reinsurers are subject to periodic examinations by state authorities.

Question 149

Which one of the following would be most likely to be a factor affecting the selection of a retention by a primary insurer in its reinsurance program?

A. Extra-contractual obligations

B. Clash cover

C. Catastrophe exposure

D. Co-participation provision

Answer 149

D. Co-participation provision

Question 150

The losses listed below arose from three policies and one occurrence:

1 $300,000
2 $600,000
3 $800,000

Given the above losses, what is the difference between the amount of loss a primary insurer would recover under a $750,000 xs $250,000 per policy excess of loss reinsurance treaty versus a $1,000,000 xs $1,000,000 per occurrence excess of loss reinsurance treaty?

A. $0
B. $50,000
C. $250,000
D. $700,000
Incorrect

Answer 150

C. Under a $750,000 excess of $250,000 per policy excess of loss reinsurance treaty, the primary insurer would recover the amount in excess of $250,000 on each loss, for a total of $950,000. Under the per occurrence excess of loss reinsurance treaty, the primary insurance would recover $700,000, or the total of all 3 losses of $1,700,000 less the $1,000,000 retention. The difference between them is $250,000.

Question 151

Jones Insurer writes only commercial property policies for businesses in Florida. Jones has a large premium base and excellent overall experience. Jones would have all of the following, EXCEPT:

A. Extra contractual obligations exposure
B. Excess of policy limits exposure
C. Clash exposure
D. Catastrophe exposure

Answer 151

C. Clash exposure

Question 152

Which one of the following correctly describes a capital market instruments used by insurers to finance risk?

Choose one answer.

A. An industry loss warranty is an insurance-linked security that covers the primary insurer in the event that the industry-wide loss from a particular catastrophe exceeds a predetermined threshold.

B. Finite risk reinsurance is a type of reinsurance in which the reinsurer’s liability is limited and anticipated investment income is expressly acknowledged as an underwriting component.

C. Under a catastrophe risk exchange, a bond is issued with the condition that if the issuer suffers a catastrophe greater than a specified amount, the obligation to pay interest and/or repay principle is deferred or forgiven.

D. A catastrophe risk exchange is an agreement that gives the primary insurer the right to a cash payment from investors if a specified index of catastrophe losses by geographic area reaches a specified level.

Answer 152

A. An industry loss warranty is an insurance-linked security that covers the primary insurer in the event that the industry-wide loss from a particular catastrophe exceeds a predetermined threshold.