Chapter 3 - Reinsurance

Question 1

What is Reinsurance?

Answer 1

Insurance for insurers.

]The buyer is an insurer or reinsurer.

Question 2

What organisations can reinsurers be?

Answer 2

1. Organisations that specialise in writing reinsurance.
2. Reinsurers that also operate as insurers.

Question 3

Summarise the ‘deal’ between insurer & reinsurer.

Answer 3

Insurer pays premium to reinsurer to transfer risk.

Reinsurer accepting transfer of risk from the insurer along with the premium.

Question 4

Why do insurers BUY reinsurance?

Answer 4

1. Risk transfer.
2. Peace of mind (protection against catastrophe-type losses).
3. Balancing out peaks & troughs.
4. Releasing capacity (insurer generally has a certain capacity per year which determines its ability to accept risks - reinsurance transfers some of the risk from insurer to reinsurer, so allows more risk to be taken on by the direct insurer).

Question 5

Why do reinsurers SELL reinsurance?

Answer 5

1. Accessing business not otherwise available:
   - Insurers need licenses from overseas regulators to insure risks out of certain countries.
   - Regulators may only agree to licenses for reinsurance out of their country.
   - Many countries want direct risks to be insured by local insurance companies.
   - They don’t want direct risk premiums to leave the country.
2. Involvement in a class of business on a trial basis:
   - Insurer may want to investigate writing a new class of business.
   - A safe way to do so is to write some reinsurance for another insurer that already writes the business.
3. Pure business preference:
   - Business of some organisations totally consists of reinsurance.
   - They actively prefer this type of business.
   - E.g. Swiss Re, Munich Re.

Question 6

What is a ‘retention’?

Answer 6

The amount of the original risk that the insurer is retaining.

The maximum size of this line is how much of any one risk the insurer can keep.

Question 7

Where can the decision on how to handle a reinsurance claim be found?

Answer 7

In the reinsurance contract wording.

Question 8

What are the 3 ways insurers & reinsurers can settle claims?

Answer 8

1. Full Follow Clause
2. Claims Co-operation Clause
3. Claims Control Clause

Question 9

What is a ‘Full Follow Clause’?

Answer 9

• The insurer makes all the claims decisions.
• Does not have to tell the reinsurer of the claim in progress.
• Reinsurer is presented with their bill to pay.
• Unpopular with reinsurers.

Question 10

What is a ‘Claims Co-operation Clause’?

Answer 10

This option is the middle ground.

The original insurer must advise the reinsurer of the loss & throughout their handling of the claim.

Question 11

What is a ‘Claims Control Clause’?

Answer 11

• The reinsurer has full-decision making control.
• Failure by the original insurer to allow this can delay any reinsurance payment.

Question 12

What is one of the main traits a reinsurance contract is built on?

Answer 12

Trust.

Trust is built on knowledge - Knowledge of the business, and knowledge of the individuals transacting the business.

Question 13

Define:

To ‘Cede’?

‘Cedant’?

‘Cession’?

Answer 13

To ‘Cede’ = The act of sharing the risk with reinsurers.

A ‘Cedant’ = Is the original insurer who is passing the risk to reinsurers.

A ‘Cession’ = Is the share of the risk passed to reinsurers.