Chapter 3 - Reinsurance Flashcards
Why is reinsurance bought? (4)
Transfer of risk
Peace of mind
Balance peaks and troughs
Release underwriting capacity
Why is reinsurance sold? (3)
What percentage of Lloyds premium is from reinsurance
Why do countries not grant direct insurance licenses
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%
What are the 3 options for reinsurer decision making claim clauses
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
What is a retrocedant
reinsurer obtaining further reinsurance
What is a retrocessionaire
reinsurer accepting risks from another reinsurer
What is an account in the context of reinsurance
Portfolio containing all risks from 1 class of business
Why would facultative reinsurance be bought? (4)
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)
Why is fac not preferred (2)
Time consuming
Administratively expensive
What is facultative obligatory insurance?
Insurer has the option to cede a risk. The reinsurer must accept it
Why is XOL insurance purchased
To cap losses
What is the retention line in XOL
Minimum loss before recoveries can start on layer
What the premium payable considerations in XOL (2)
How frequently the layer is hit
Policy limit
What are the 2 types of layers in XOL (how does the relative premium differ)
Working - Lower layers, higher amounts of premium
Catastrophe - High layers, relatively lower premium
How is an adjustable basis for xol premium calculated?
Based on cedant’s gross overall premium
What does the wording 100,000 at 5% OGPI mean?
Deposit premium = 100k
Year end premium additionally is 5% of cedant’s original gross premium income
What are deposit and minimum premiums
Deposit = Amount paid at start of year
Minimum = the minimum total premium payable, irrespective of later adjustments
What does FGU mean?
From the ground up - starting from zero
What are reinstatements in reinsurance, how does brokerage work for reinstatements
Reviving a spent layer in return for additional premium
Brokerage is only paid for original premium
What are the 4 common ways an XL contract is setup to cover
Per class of business
Per risk
Per all marine / non marine accounts
Per whole account
How are claims handled on reinsurance policies? Why is grouping beneficial for insurers?
They are grouped together where possible from 1 event
Recoveries are larger, excess is only paid once
What is a collecting note?
Document from insurer to reinsurer documenting losses arising from 1 event
What is combined and loss ratio?
CR = claims + operating costs over gross premium
LR = claims / gross premium
What is stop loss?
Same as XOL but combined ratio is used as the limit and excess
What is quota share?
Proportional treaty, insurer must cede all risks up to reinsurer
In what situations would a 100% quota share be used?
Fronting - insurer is acting as a face in the local market, keeps no risk
What is surplus treaty?
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
When is a surplus treaty used?
Extra limits on where the business is particularly good
What are the 5 considerations to building a reinsurance portfolio?
Unusual risks - fac
Classes of business. Prop first then non prop
Specific use cases for XL contracts
Whole account protection
catastrophe protection
Why is timing important in reinsurance contracts?
Reinsurers want to know whether they’re the first port of call or picking up excess bits of loss
Who provides terrorism reinsurance? Give an example
Governments, TRIA (US)
What is the flood re fund?
home insurers must pay into the flood re in UK
