Chapter 3 - Reinsurance

Question 1

What is reinsurance?

Answer 1

Risk transfer from insurer to a reinsurer

Question 2

What does reinsurance provide for the insurer?

Answer 2

Peace of mind
Evens out peaks and troughs in results

Question 3

What does reinsurance allow for the insurer?

Answer 3

Releases capacity for the insurer to write more direct business

Question 4

Can a firm specialise in just reinsurance?

Answer 4

Yes

Question 5

Why do firms sell reinsurance?

Answer 5

1. Access types of business / parts of the world that they cannot or do not want to access directly. Limited by overseas licence regulators / surplus lines - prevents premium leaving the country, give to local insurers
2. Trial a class of business via an insurer instead of hiring a team
3. Preference e.g., Munich Re, Swiss Re

Question 6

Is London the largest reinsurance market in the world?

Answer 6

No

Question 7

Are there different types of reinsurance? Are some more akin to financial instruments than traditional reinsurance products?

Answer 7

Yes

Question 8

What are the main reinsurance products?

Answer 8

Facultative
Proportional treaty
Non-proportional treaty

Question 9

Do reinsurance contracts contain provisions about the amount of in put that the reinsurer can have in the original claims?

Answer 9

Yes

Question 10

What does retrocession mean?

Answer 10

Reinsurance contract where the buyer is already a reinsurer

Question 11

When is facultative reinsurance usually purchased?

Answer 11

Used to protect an individual, usually unusual risks

Question 12

What is proportional reinsurance?

Answer 12

Insurer and reinsurer sharing risks in equal proportions - subject to the cap on the reinsurance

Question 13

What are the two main types of proportional reinsurance?

Answer 13

Quote share
Surplus lines

Question 14

What is excess of loss reinsurance?

Answer 14

Non-proportional
Purchased in vertical layers - could be different reinsurers through different brokers
If there is a claim, then work through layers/policy limits to see which reinsurers need to pay out

Question 15

What is the purpose of stop loss insurance?

Answer 15

Protect an insurer’s loss ratio - premium vs claims and operating costs
>100% then insurers have made a loss
Done in layers like XOL

Question 16

What is the term used for the amount of the original risk an insurer is retaining?

Answer 16

Retention
Retained line

Question 17

Are there set rules for a reinsurance programme when being constructed?

Answer 17

No

Question 18

What must an insurer consider when writing a reinsurance contract?

Answer 18

Exposures
How much they are willing to pay

Question 19

Can individual risks be protected with facultative reinsurance?

Answer 19

Yes

Question 20

Can different classes of business be in one treaty?

Answer 20

No - prop or non-prop

Question 21

How can an insurer’s entire account be protected?

Answer 21

With a non-prop treaty

Question 22

If more than one reinsurance policy is available for a claim, what order are they triggered in?

Answer 22

Fac
Prop
Non-prop

Question 23

What are the 3 main clauses for reinsurance claims?

Answer 23

1. Full follow clause
2. Claims co-operation clause
3. Claims control clause

Question 24

What is a full follow clause?

Answer 24

Insurer makes all claims decisions and presents a bill
Preferred by original insurers

Question 25

What is a claims co-operation clause?

Answer 25

Middle ground Insurer has to advise reinsurer of the loss/handling during a claim Reinsurer does not have any right to interfere with insurers claims handling strategy/decision making

Question 26

What is a claims control clause?

Answer 26

Reinsurers preferred option Allows reinsurer to have full decision-making control over

Question 27

What is a collecting note?

Answer 27

Document used to present claim to reinsurers for XOL

Question 28

What is non-proportional reinsurance?

Answer 28

Premium and claims do not have a direct correlation Claims paid in pre-agreed amount

Question 29

What is proportional reinsurance?

Answer 29

premium and claims shared between insurer and reinsurer

Question 30

What is reinstatement/reinstatement premiuim?

Answer 30

Non prop reinsurance for layer to be 'reinstated' after a loss with additional premium e.g., 1m with 3 reinstatements = 4m worth of claims

Question 31

Is fac RI more expensive than other types of RI?

Answer 31

Yes - not bulked

Question 32

What is fac obligatory reinsurance?

Answer 32

Risk is written by insurer, then reinsurer has to accept it Usually when good trusting relationship Insurer has ability to pass on bad risks

Question 33

What are the lower layers in a reinsurance programme known as?

Answer 33

Working layers More likely to pay a claim - lower limit

Question 34

What are higher layers in a reinsurance programme known as?

Answer 34

Catastrophe layers Less likely to pay a claim - less common

Question 35

Are premiums for a non proportional reinsurance be shown on an adjustable basis?

Answer 35

Yes - start of the year, cedant doesn't know what amount of premium needs to be protected Pay a deposit premium then adjust

Question 36

What happens if all reinsurance layers are used up leaving the claim exposed for an insurer?

Answer 36

Reinstate the policy a number of times to collect more than one total loss in the year Reinsurer might do this without charge but some charge proportion of orig premium

Question 37

Do reinstatement premiums trigger payment of brokerage to the broker?

Answer 37

No

Question 38

What is a quota share treaty?

Answer 38

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., 30% quota share, 30% of premium to reinsurer, 30% of claims paid by reinsurer Proportion defined in contract - retention

Question 39

What is an 100% quota share known as?

Answer 39

Fronting arrangements - insurer is acting as a local face in a market to satisfy regulatory requirements but keeps none of the risk itself

Question 40

What is an underwriters maximum retained line?

Answer 40

Controls around how large a share of any risk it can accept

Question 41

What is a surplus lines treaty?

Answer 41

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

Question 42

What are examples of government-based reinsurance programmes?

Answer 42

TRIPRA Terrorism Risk Insurance Program Reauthorization Act aka TRIA - Terrorism Risk Insurance Act