Chapter 2 - Different types of reinsurance Flashcards
1
Q
What are the different types of reinsurance?
A
Fac - Quota Share & Excess of Loss
Fac Oblig
Treaty - QS & Surplus / XOL & Stop Loss
2
Q
What other type of risk might be a suitable proposition for facultative reinsurance?
A
Any large, complex or extra-hazardous risk could fall under this heading. Examples include large construction projects such as dams or skyscrapers, scientific research establishments or nuclear power stations.
3
Q
What are the uses of facultative reinsurance?
A
- Where the insurer requires capacity beyond its treaties providing automatic underwriting capacity.
- Where the risk is excluded from the insurer’s treaty reinsurance.
- Where the insurer does not want to cede the risk to its reinsurance treaty
- Where the original risk is hazardous.
- Where there are unique commercial, financial or strategic reasons.
- Where the insurer is new to a particular market segment,
- Where there are elements within the account to be reinsured that have a greater level of risk than the remaining lines.
4
Q
What are the advantages of Fac RI?
A
- Risks are considered individually. Reinsurers can negotiate a suitable premium for the actual risk concerned rather than having to consider it as part of an overall portfolio of risks.
- Facultative insurance increases the insurer’s competitive edge within its chosen market.
- There is a freedom for the insurer to offer any risk which may then be accepted or declined by the reinsurer.
- The exposures to an insurer’s treaty reinsurance could be protected by facultative reinsurance of particular risks to ensure a better overall result and lower reinsurance cost in the long-term.
- An insurer might benefit from the specific knowledge of the facultative reinsurer with regard to the nature and potential of the risk.
- There is an opportunity for both parties to develop a successful and mutually-beneficial relationship.
- A successful facultative relationship with a reinsurer might be a precursor to the insurer offering it a place on its schedule of treaty reinsurers.
5
Q
What are the disadvantages of FAC RI?
A
- As risks are considered individually, the insurer cannot be certain of the placement of the facultative reinsurance
- The administration involved is labour-intensive and expensive
- Delay in issuing a policy can create problems with clients and affect the insurer’s chances of securing their participation on the original risk.
- The insurer may need to disclose full information regarding its underwriting of the risk.
- There is the possibility of the reinsurer exercising a certain amount of influence over the insurer’s underwriting
- The insurer may lose control over the handling of the risk.
6
Q
What are the advantages of treaty reinsurance?
A
- The reinsured has automatic reinsurance cover and so problems associated with the individual consideration of risks on a facultative basis do not apply.
- The reinsured receives a contribution towards costs for proportional treaties in the form of ceding commission.
- The reinsured can receive an additional contribution if the business is profitable for proportional treaties in the form of profit commission.
- Administration is quicker and easier than for facultative reinsurance.
- Accounting procedures can be simplified by the use of quarterly accounting.
- As treaties generally deal with a large number of homogeneous risks, computer technology can be used for data storage and analytical techniques.
7
Q
What are the disadvantages of treaty reinsurance?
A
- There is no freedom of choice since both parties are tied into the contract.
- The treaty cannot be cancelled before the end of the period, unless a specific cancellation provision is agreed.
- Therefore, there has to be a degree of trust in the underwriting ability of the original insurer.
- A disproportionate amount of premium may have to be ceded to reinsurers on small, good risks that an insurer would otherwise prefer to retain for its own account
8
Q
A
