Chapter 3 - Reinsurance Flashcards
Why does an insurer purchase reinsurance?
Risk transfer
Peace of mind
Balancing out peaks and troughs
Releasing capacity
Why do firms sell reinsurance?
Accessing business otherwise not available (regulator may only permit them for reinsurance)
Becoming involved in a class of business on a trial basis
Pure business preference
What is facultative reinsurance?
Reinsurance which an insurer buys to protect itself in relation to one risk only, making it time consuming in the admin process
Often bought because it is the only reinsurance available for a slightly unusual risk written
What is Facultative obligatory reinsurance?
Insurer makes an agreement with reinsurers that for all risks written which fall within a pre-determined set of criteria, with the original insurer having the choice whether to cede the risk. If they decide to, the reinsurer is obligated to accept it
What is Excess of Loss (XL) Reinsurance?
Non-proportional (No concept of sharing the premium and the claims in proportions or percentages), The coverage is bought/sold in layers which can be of any size, to build a reinsurance programme
What is stop loss reinsurance?
Insurers can purchase stop loss cover to protect them in the event of a loss, provides layers of protection but is only triggered when an insurer’s combined ratio exceeds a certain point
What is a proportional reinsurance?
They show a clear relationship between the premium that the original insurer receives the amount passed to reinsurers
What is a quota share treaty?
For every risk that the insurer accepts it will cede it to the treaty and pay an agreed proportion of the premium to the reinsurer. E.g. if 30% could be ceded to reinsurers it is known as a 30% quota share.
What is the difference between working and catastrophe layers?
Working - usually the lower layers
Catastrophe - higher layers and will usually charge less premium as the theoretical result of the insured event occurring is lower than that of the working layers coverage
What are reinstatements in reinsurance?
Triggers to bring back the policy to life after a loss usually for the payment of additional premium
How can a grouping under XL cover be set up?
Single classes of business (where claims can only be grouped coming out of the protected classes of business)
Single risk (known as per risk or risk of excess contracts)
All marine or non-marine accounts
Whole account (everything the insurer writes)
What is surplus treaty or surplus line treaty?
The original insurer buys reinsurance in what are known as ‘lines’ which are the same as the maximum lines or shares that it can accept on any one risk on its own.
This reinsurance type allows the underwriter’s permitted line to be increased in multipliers of the original line. E.g. if they needed to increase their line by 5 times it would be known as five-line surplus treaty
What are the basic principles which apply to reinsurance programme construction?
The insurer should start to think whether they have any unusual risks where fac may need to be purchased.
Insurer should think about individual classes of business and reinsurance for all risks in that class, usually proportional considered first
Insurer should then think about some XL cover for say all marine or non-marine
Perhaps some XL cover for whole account
Above this might be whole account XL cat protection
What do government based reinsurance programmes focus on?
Providing terrorism-related reinsurance cover for the commercial insurance market
what is claims co-operation within a reinsurance contract?
Means that the cedant just has to keep the reinsurer informed but the cedant maintains control of the decision making
