Chapter 3 - Reinsurance Flashcards
What is reinsurance?
when insurers want to transfer some of their own risk to other insurers
Why do insurers buy reinsurance?
- risk transfer
- increase capacity
- balance out peaks and troughs
- peace of mind
Why sell reinsurance?
- access business not otherwise accessible
- become involved in a class of business on a trial basis
- pure business preference
What percentage of Lloyd’s premium income in 2019 was reinsurance?
32%
What is full follow clause?
- insurer does not have to inform reinsurer about claim, just presents them a bill
- unpopular with reinsurers
- if any suggestion of in-proper action reinsurer has right to ask questions
What is claims co-operation clause?
- insurer informs reinsurer of claims and during handling process
- reinsurer does not necessarily have right to interfere with claims handling strategy
What is claims control clause?
- reinsurers preference
- reinsurer has full decision making authority
- failure to comply by original insurer could result in delay of reinsurance recovery or ability to recover at all
Define to cede
act of sharing risk with reinsurers
Define cedant
original insurer passing risk
Define cession
share of the risk passed to reinsurers
Define collecting note
document presented to reinsurer for claim under excess of loss reinsurance
Define facultative reinsurance
reinsurance for an individual risk
Define non-proportional reinsurance
Premium and claims do not have a direct correlation, premium set more in line with direct insurance and claims dealt with on a financial basis
e.g excess of loss, stop loss
Define proportional reinsurance
Premium and claims shared in pre-agreed proportions
e.g quota share, surplus treaty
Define retrocedant
reinsurer obtaining reinsurance for itself
Define retrocession
Cession where entity ceding is a reinsurer
Define retrocessionaire
Reinsurer accepting reinsurance from an entity that is a reinsurer
Define treaty reinsurance
reinsurance for a wide book of risks, e.g a whole class of business or an insurer’s whole portfolio
Why would an insurer buy facultative reinsurance?
- written a larger line on something that it wanted to
- risk is unconventional and falls outside of what is covered in their treaties
Why do insurers have to think carefully about reinsurance?
- generally more expensive
- if too expensive, risk loses money before any claims
- should be treated like direct insurance
What is facultative obligatory insurance?
insurer has an agreement with reinsurer that if writing a risk within criteria the insurer has a choice to cede, if decides to reinsurer has to accept
How is the premium for non-proportional reinsurance show?
adjustable based on cedant’s overall gross premium income with a minimum
What is the danger of excess of loss reinsurance?
insurer could “burn through” the cover - reinsurers may reinstate a number of times throughout policy period, usually for a fee
When can claims be grouped for presentation to the reinsurer?
When they arise out of one event
Why would insurers want to group claims?
Insurer only has to pay first layer once
What happens if a claim is presented that would breach the first life of an excess of loss policy?
Premium is payable to the reinsurer to activate the second life
What is a combined ratio and when is the insurer profitable?
claims + operating costs / premium
if less than 100% then profitable
What is stop loss reinsurance?
Triggered when an insurers combined ratio exceeds a specific point (e.g 103%), and covers losses until combined ratio hits another point (e.g 130%)
Describe quota share treaty
Insurer and reinsurer share premium and claims proportionally - say 70/30
- reinsurer sees every risk that falls into the criteria
Describe surplus line treaties
Lines of reinsurance which are the same size as the maximum line allowed to write
E.g if max line is 5m and want to write a 15m risk, need two surplus lines to cover
How is a reinsurance programme constructed?
- consider if any individual risks do not fit into proportional / non-proportional contracts and buy fac for these
- insurer thinks about individual classes of business and reinsurance for all risks that fall into those classes, proportional considered first then non-proportional
- insurer could think about XL protection for specific classes
- XL protection for whole account
- catastrophe XL protection for whole account
