Chapter 29

Question 1

Define Reinsurance.

Answer 1

An arrangement whereby one party in return for a premium agrees to indemnify another party against part or all of the liability assumed by the cedant under one or more insurance policies, or under one or more reinsurance contracts.

Question 2

Define cession.

Answer 2

The liability transfer from the direct writer to the reinsurer.

Question 3

Define retrocession.

Answer 3

The liability transfer from one reinsurer to another.

Question 4

What type of risks can be transferred from an insurer to a reinsurer?

Answer 4

Insurance risks, e.g.
* Mortality and morbidity
* Market and timing risks
* Operational risks
* Capital planning risks

Question 5

What is treaty reinsurance?

Answer 5

• A RI arrangement that covers all risks written within the agreed guidelines
• Covers different risks that have certain characteristics in common
• If risk meets the agreed guidelines, the ceding company must cede, and the reinsurer has to accept

Question 6

What is facultative reinsurance?

Answer 6

• A reinsurance arrangement where each risk to be reinsured is offered to and is accepted/rejected by the reinsurer
• The ceding company is not obligated to cede and the reinsurer not obligated to accept

Question 7

What are the main types of reinsurance contracts?

Answer 7

• Coinsurance
  — on original terms (QS and individual surplus)
  — on level risk premium terms (QS and individual surplus)
• Risk premium reinsurance
• XOL reinsurance
• FinRe
• Facultative and obligatory reinsurance

Question 8

For proportional reinsurance, what are the two ways in which the amount to be reinsured can be specified?

Answer 8

QS - specified constant proportion of each policy is reinsured
Individual surplus - reinsured amount is excess of the benefit over the retention limit

Question 9

How does original terms reinsurance work?

Answer 9

• It involves sharing of all aspects of the original contract
• The premium is split between the insurer and reinsurer in fixed proportion and any claim is split in the same proportion
• The reinsurer shares in the full risks of the policy, including investment and early lapse risk

Question 10

What is reinsurance commission?

Answer 10

• It is a payment made by the reinsurer to the ceding company as part of the RI arrangement.
• It compensates the ceding insurer for expenses relating to acquiring and administering the policies.
• It helps to offset costs such as underwriting, policy issuance and agent commissions.

Question 11

What are the factors that a reinsurer should consider on how much reinsurance commission to offer?

Answer 11

PEPPER MUUR ICP

Question 12

Other than commission, what criteria may make a reinsurer attractive?

Answer 12

• Greater financial strength - less likely to default
• Offer broader coverage - e.g. higher SAs

Question 13

How does level risk premium terms work under coinsurance?

Answer 13

The reinsurer supplies the cedant with a set of premium rates upon which the cedant can load its costs and profit test against intended retail rates.
The insurer will price its products in knowledge of reinsurance terms it will be able to obtain.

Question 14

What is the extent of reinsurance commission under the level risk premium terms under coinsurance?

Answer 14

It is much less significant compared to original terms reinsurance. The reinsurance premium will probably have smaller margins than retail rates.

Question 15

What are the two ways in which the amount reinsured can be specified under the level risk premium terms under coinsurance?

Answer 15

• QS - specified % of each policy is reinsured
• Individual surplus - excess of benefit over the insurer’s retention limit

Question 16

Define risk premium reinsurance.

Answer 16

The cedant reinsures, on the reinsurer’s risk premium basis:
* Part of the SA
* Sum at risk (excess of the benefit payable over the reserve)

Question 17

How is the risk premium reinsurance usually structured in terms of reviewability?

Answer 17

It can be annually reviewable or guaranteed for the policy duration.

Question 18

What is a special advantage of risk premium reinsurance?

Answer 18

There may be some form of profit participation - share of any profits to the reinsurer are paid back to the direct writer.

Question 19

Is the reinsurer exposed to lapse risk under risk premium reinsurance?

Answer 19

No.

Question 20

What is the extent of reinsurance commission under risk premium reinsurance?

Answer 20

Usually not significant.

Question 21

How is the risk premium calculated?

Answer 21

RP rate multiplied by the benefit covered by the reinsurer.
Where the RP is based on the probability of claim over the year and it includes loadings for expenses and profit.

Question 22

How is the risk premium paid?

Answer 22

Every year, and it changes from year to year.

Question 23

Why will the risk premium vary under risk premium reinsurance?

Answer 23

• If RI is based on the SAR, it is likely to change the reinsurer’s risk since the SAR is likely to change
• The RP will change because it will be based on older age of the PH
• If the reinsurance pricing basis is not guaranteed, the RP may change as result of the reinsurer carrying out a pricing review.

Question 24

What happens if the benefit exceeds the max amount covered by the reinsurer?

Answer 24

The liability reverts back to the insurer.

Question 25

XOL reinsurance can be enacted on:

Answer 25

Risk basis - reinsurer pays any loss on an individual risk, in excess of retention limit Occurrence basis - reinsurer pays aggregate loss, which exceeds the retention limit, from any one occurrence of an event

Question 26

How is XOL reinsurance paid for?

Answer 26

The insurer will pay a risk premium to cover the reinsurer's expected loss, allowing for expenses and profit margins.

Question 27

What is the aim of catastrophe XOL reinsurance?

Answer 27

To reduce the potential loss to the cedant due to any non-independence of risks insured.

Question 28

How is the cover under catastrophe XOL reinsurance usually structured?

Answer 28

Usually only available and paid for on a yearly basis and must be renegotiated each year.

Question 29

What are the benefits of catastrophe XOL reinsurance being renegotiated each year?

Answer 29

* Allows the reinsurer to vary their premiums * Freedom over the charges could lead to lower rates for the IC * IC can shop around

Question 30

When will the reinsurer pay out under catastrophe XOL reinsurance?

Answer 30

If a catastrophe, as defined in the contract, occurs.

Question 31

How is a catastrophe defined?

Answer 31

* There is no standard definition of what constitutes a catastrophe. * Typically to qualify there needs to be a min number of deaths from a single incident with deaths occurring within a specified time period

Question 32

How will the reinsurer's liability be defined under catastrophe XOL reinsurance?

Answer 32

* It might be the excess of the total claim amount over the cedant's catastrophe retention limit. * The reinsurer's liability in respect of a single catastrophe claim would be subject to a max and any amount above this would revert to the cedant * Usually there is a max amount of cover per life

Question 33

Would the catastrophe XOL reinsurance exclude certain risks?

Answer 33

Yes, such as war risks, epidemics and nuclear risks. However, separate catastrophe covers may be available for any excluded risks.

Question 34

How does Stop loss reinsurance work?

Answer 34

The reinsurer pays the aggregate claims over a predetermined retention for a portfolio over a given time period. The portfolio's loss to the cedant is capped in any period.

Question 35

What are the features of financial reinsurance?

Answer 35

* It is primarily used as a means of improving accounting or supervisory solvency position of the cedant. * It tends to involve a small element, if any, of transfer of insurance risk to the reinsurer. * It is not effective under accounting or supervisory regimes where credit can be taken for future profits or where a realistic liability has to be held in respect of the loan repayments.

Question 36

What does risk premium reinsurance under FinRe do for the ceding company?

Answer 36

It relieves the cedant of part of its NB financing requirement.

Question 37

Why would a straightforward loan not relief the cedant of its NB financing requirement?

Answer 37

The loan would have to be added to the liabilities, and this would worsen the scenario.

Question 38

How does FinRe work for risk premium reinsurance?

Answer 38

The loan is usually presented as the initial reinsurance commission related to the volume of business reinsured. The repayments are added to the reinsurance premiums. The reinsurer considers the expected lapse experience of the book when determining the loan payments.

Question 39

How does a contingent loan work?

Answer 39

It makes use of future profits contained in a block of NB or EB to enhance assets.

Question 40

How does a contingent loan work?

Answer 40

The reinsurer provides a loan to the cedant, but, as the loan is contingent upon a stream of profits being generated by business: * Cedant may not need to reserve for the repayment within its supervisory reserves * The contingent loan does not have to be shown as a liability - improving the cedant's capital position

Question 41

When is a facultative/facultative arrangement appropriate?

Answer 41

For very large policies that are shopped around the reinsurance market on a case-by-case basis.

Question 42

When is a facultative/obligatory treaty appropriate?

Answer 42

Where the insurer has a panel of reinsurers ready to provide capacity for large risk.

Question 43

How does an obligatory/obligatory reinsurance arrangement work?

Answer 43

* It is formalised in a treaty * The cedant must present all the cases above a certain limit to the reinsurer * If it meets the treaty requirements, the reinsurer has to take it.