Chapter 12 Reinsurance; Industry Organizations; The Customer

Question 1

What is reinsurance?

Answer 1

Is to insure again by transferring to another insurance company all or part of a liability assumed.

Insurance for an insurance company.

Question 2

Explain the difference between cession and retention.

Answer 2

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.

Question 3

Why do insurers reinsure?

Answer 3

• 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

Question 4

How does reinsurance increase an insurer’s capacity to write business?

Answer 4

It allows an insurer to write a higher level of risk and accept larger amounts than it might be able to on its own.

Question 5

How can an insurer deal with a sudden large increase in new business that leaves it with insufficient assets to meet reserve requirements?

Answer 5

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.

Question 6

How is reinsurance used to reduce the effect of catastrophic losses?

Answer 6

It enables an insurer to control losses from a single event, an effective way spreading risk among as many people as possible.

Question 7

How can an insurer limit the amount of its losses in any given year?

Answer 7

It enables an insurer to plan ahead of time how much it is prepared to pay out for losses.

Question 8

Explain the difference between proportional and non-proportional reinsurance.

Answer 8

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.

Question 9

What is a priority?

Answer 9

Is that amount of any loss that the insurer will pay. (retention)

Question 10

How does a treaty operate?

Answer 10

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.

Question 11

What is facultative reinsurance?

Answer 11

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.

Question 12

What is the general purpose shared by many insurance industry organizations?

Answer 12

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.

Question 13

What are the functions of the Insurance Bureau of Canada?

Answer 13

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

Question 14

What is the Vehicle Information Centre of Canada (VICC), and what are some of its functions?

Answer 14

It is a database wherein vehicle information is kept for the insurance company.

Question 15

What are the most common types of fraud encountered in insurance?

Answer 15

Organized automobile theft and staged automobile accidents and fraudulent injury claims.

Question 16

What is the purpose of the Facility Association?

Answer 16

To ensure all “high risk” drivers are able to obtain insurance, a pooling arrangement is established whereby all “high risk” drivers could be underwritten in a common pool and the profits or losses would be shared by all insurers in the province. It operates in Alberta, New Brunswick, Newfoundland, Nova Scotia, Northwest Territories, Ontario, Prince Edward Island and Yukon. Quebec has a similar plan.

Question 17

What are the goals of the Insurance Brokers’ Association of Canada (IBAC)?

Answer 17

its goals are to elevate the status of independent insurance intermediaries through professional development and to safeguard the public interest by establishing improved standards of qualification and ethics.

It developed and maintains licensing courses.

Question 18

What are the goals of the Canadian Independent Adjusters’ Association (CIAA)

Answer 18

provides leadership for Canada’s independent adjusters through advocacy, education, and recognized professional standards. Nine regions are represented: Pacific, Western, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, PEI, Nova Scotia and Newfoundland.

Question 19

What are the functions of the Canadian Insurance Claims Managers’ Association?(CICMA)

Answer 19

To administer the Canadian Inter-Company Arbitration Agreement which arbitrate disputes among companies who are signatories to the agreement. It avoids possible cases of litigation between insurers.

Question 20

Why are customers’ perceptions of the insurance industry so important?

Answer 20

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