Chapter 3 - Reinsurance

Question 1

Why is reinsurance bought? (4)

Answer 1

Transfer of risk
Peace of mind
Balance peaks and troughs
Release underwriting capacity

Question 2

Why is reinsurance sold? (3)
What percentage of Lloyds premium is from reinsurance
Why do countries not grant direct insurance licenses

Answer 2

Accessing business, not available through direct - regulators want to keep premium flow local
Trying out a new class of business (lower overhead costs compared to setting up dedicated team)
Business preference
35%

Question 3

What are the 3 options for reinsurer decision making claim clauses

Answer 3

Full follow - insurer makes all the claims decisions
Claims cooperation - insurer has to advise reinsurer of all losses made
Claims control - reinsurer has full claims making control

Question 4

What is a retrocedant

Answer 4

reinsurer obtaining further reinsurance

Question 5

What is a retrocessionaire

Answer 5

reinsurer accepting risks from another reinsurer

Question 6

What is an account in the context of reinsurance

Answer 6

Portfolio containing all risks from 1 class of business

Question 7

Why would facultative reinsurance be bought? (4)

Answer 7

Insuring an unusual risk falling outside of the treaty
Larger signed line than others on a risk
Only option available
Reinsuring a specific element from direct insurance (e.g. specifically earthquakes from property insurance)

Question 8

Why is fac not preferred (2)

Answer 8

Time consuming
Administratively expensive

Question 9

What is facultative obligatory insurance?

Answer 9

Insurer has the option to cede a risk. The reinsurer must accept it

Question 10

Why is XOL insurance purchased

Answer 10

To cap losses

Question 11

What is the retention line in XOL

Answer 11

Minimum loss before recoveries can start on layer

Question 12

What the premium payable considerations in XOL (2)

Answer 12

How frequently the layer is hit
Policy limit

Question 13

What are the 2 types of layers in XOL (how does the relative premium differ)

Answer 13

Working - Lower layers, higher amounts of premium
Catastrophe - High layers, relatively lower premium

Question 14

How is an adjustable basis for xol premium calculated?

Answer 14

Based on cedant’s gross overall premium

Question 15

What does the wording 100,000 at 5% OGPI mean?

Answer 15

Deposit premium = 100k
Year end premium additionally is 5% of cedant’s original gross premium income

Question 16

What are deposit and minimum premiums

Answer 16

Deposit = Amount paid at start of year
Minimum = the minimum total premium payable, irrespective of later adjustments

Question 17

What does FGU mean?

Answer 17

From the ground up - starting from zero

Question 18

What are reinstatements in reinsurance, how does brokerage work for reinstatements

Answer 18

Reviving a spent layer in return for additional premium
Brokerage is only paid for original premium

Question 19

What are the 4 common ways an XL contract is setup to cover

Answer 19

Per class of business
Per risk
Per all marine / non marine accounts
Per whole account

Question 20

How are claims handled on reinsurance policies? Why is grouping beneficial for insurers?

Answer 20

They are grouped together where possible from 1 event
Recoveries are larger, excess is only paid once

Question 21

What is a collecting note?

Answer 21

Document from insurer to reinsurer documenting losses arising from 1 event

Question 22

What is combined and loss ratio?

Answer 22

CR = claims + operating costs over gross premium
LR = claims / gross premium

Question 23

What is stop loss?

Answer 23

Same as XOL but combined ratio is used as the limit and excess

Question 24

What is quota share?

Answer 24

Proportional treaty, insurer must cede all risks up to reinsurer

Question 25

In what situations would a 100% quota share be used?

Answer 25

Fronting - insurer is acting as a face in the local market, keeps no risk

Question 26

What is surplus treaty?

Answer 26

Proportional insurance where limits are expressed in proportion to their maximum line. E.g. Limit = 6M, 5x line = 30M. Premium and claims are in proportion

Question 27

When is a surplus treaty used?

Answer 27

Extra limits on where the business is particularly good

Question 28

What are the 5 considerations to building a reinsurance portfolio?

Answer 28

Unusual risks - fac
Classes of business. Prop first then non prop
Specific use cases for XL contracts
Whole account protection
catastrophe protection

Question 29

Why is timing important in reinsurance contracts?

Answer 29

Reinsurers want to know whether they’re the first port of call or picking up excess bits of loss

Question 30

Who provides terrorism reinsurance? Give an example

Answer 30

Governments, TRIA (US)

Question 31

What is the flood re fund?

Answer 31

home insurers must pay into the flood re in UK