Chapter 12 Reinsurance; Industry Organizations; The Customer Flashcards
What is reinsurance?
Is to insure again by transferring to another insurance company all or part of a liability assumed.
Insurance for an insurance company.
Explain the difference between cession and retention.
Cession - is the amount ceded when an insurer reinsures it’s liability with another company it cedes business.
Retention - is the amount the original insurer keeps for its own account.
Why do insurers reinsure?
• To increase the insurer’s capacity to write business
• To maintain a proper reserve/liability balance
• To reduce the effect of a catastrophic loss
• To provide stability in a fluctuating market
• To enable an insurer to cease operations quickly
How does reinsurance increase an insurer’s capacity to write business?
It allows an insurer to write a higher level of risk and accept larger amounts than it might be able to on its own.
How can an insurer deal with a sudden large increase in new business that leaves it with insufficient assets to meet reserve requirements?
It allows the insurer to grow faster by reinsuring a greater portion of new business and decreasing its reserve requirements by transferring the liability to a reinsurer.
How is reinsurance used to reduce the effect of catastrophic losses?
It enables an insurer to control losses from a single event, an effective way spreading risk among as many people as possible.
How can an insurer limit the amount of its losses in any given year?
It enables an insurer to plan ahead of time how much it is prepared to pay out for losses.
Explain the difference between proportional and non-proportional reinsurance.
In proportional reinsurance, a percentage of the risk i.e. 25% of $200000 ($80000) is transferred to the reinsurer on a proportional basis; the reinsurer receives the same percentage of risk ($20000).
In non-proportional reinsurance, no proportional ceding of the risk and no proportional sharing of the premium or the losses. The insurer will pay all of the loss up to an agreed amount; the reinsurer will then pay all or part of the loss which exceeds the priority up to a limit agreed between the insurer and reinsurer.
What is a priority?
Is that amount of any loss that the insurer will pay. (retention)
How does a treaty operate?
Is an agreement between the insurer and the reinsurer which provides for automatic reinsurance.
A contract on a yearly basis covering whole class of risks.
Provide less flexibility but more economical to administer and there is no danger of a risk being overlooked for reinsurance.
What is facultative reinsurance?
Is more flexible as reinsurance is placed on a case by case basis.
The insurer is free to decide where to place a risk to be reinsured and vice versa.
It is a valuable and essential form of reinsurance but providing underwriting information, handling each claim individually is time-consuming and expensive.
What is the general purpose shared by many insurance industry organizations?
To provide to the industry many services such as loss prevention, education, fraud detection and prevention, rate making, standard policy wordings, gathering of industry statistics, and monitoring of legislation.
What are the functions of the Insurance Bureau of Canada?
1. Issues Management - as the voice of the P & C insurers, lobbies federal and provincial governments to secure changes in public policy and improvements in the business operating environment that will benefit insurers and their customers.
2. Investigative Services - serves member companies and the insuring public by detecting and preventing insurance-related crime (Fraud TIPS line)
3. Insurance Information - collects, validates, stores, and analyses a vast amount of information and is used for 3 purposes:
- Support IBC lobbying and communication efforts
- Support insurance regulators’ objective of monitoring the industry - supplier of GISA (General Statistical Agency)
- Support individual companies’ business decisions
What is the Vehicle Information Centre of Canada (VICC), and what are some of its functions?
It is a database wherein vehicle information is kept for the insurance company.
What are the most common types of fraud encountered in insurance?
Organized automobile theft and staged automobile accidents and fraudulent injury claims.