Chapter 5 - Reinsurance Products (Background)

Question 1

Ceding Company (Cedant)

Answer 1

An insurer or reinsurer that passes (or cedes) a risk to a reinsurer

Question 2

Facultative-obligatory reinsurance

Answer 2

A reinsurance facility where the cedant has the option to reinsure, but the reinsurer is obligated to accept the risk if the insurer chooses to reinsure the risk

Question 3

Facultative reinsurance

Answer 3

A reinsurance arrangement covering a single risk as opposed to a treaty arrangement; commonly used for very large risks or portions of risk written by a single insurer

Question 4

Inwards reinsurance

Answer 4

Reinsurance business accepted or written by an insurer or reinsurer, as opposed to outwards reinsurance which is ceded to a reinsurer

Question 5

Letter of credit

Answer 5

A financial guarantee issued by a bank that permits the party to which it is issued to draw funds from the bank in the event of a valid unpaid claim against another party

Question 6

Losses occurring (or losses occurring during) policy

Answer 6

A reinsurance policy providing cover for losses occurring in the defined period no matter when they are reported, as opposed to a claims-made policy or risks-attaching policy

Question 7

Net premium

Answer 7

The premium net of the cost of reinsurance, although it could also mean net of premium tax, or net of acquisition expenses and/or commission

Question 8

Non-proportional reinsurance

Answer 8

Reinsurance arrangements, where the claims are not shared proportionately between the cedant and reinsurer. The reinsurer covers the loss suffered by the insurer that exceeds the excess/retention point

Question 9

Outwards reinsurance

Answer 9

Reinsurance ceded by an insurer or reinsurer, as opposed to inwards reinsurance, which is reinsurance accepted

Question 10

Primary insurer

Answer 10

An insurer providing cover directly to the insured policyholder, as distinct from a reinsurer. Also referred to as a direct writer

Question 11

Proportional reinsurance

Answer 11

A reinsurance arrangement where the reinsurer and cedant share the claims proportionally. Usually, premiums follow the same proportions but commission rates may differ. Two types commonly arise; quota share and surplus

Question 12

Reciprocity

Answer 12

An arrangement between two insurers who agree to reinsure risks with each other. Commonly used with quota share reinsurance to diversify the insurer’s overall portfolios

Question 13

Replacement

Answer 13

A basis of cover under which the insurer pays the cost of replacing the insured item with a similar but new item. Also referred to as ‘replacement as new’ or ‘new for older’ and contrasts with ‘the principle of indemnity’

Question 14

Retention

Answer 14

The amount (or proportion) or risk retained by the cedant under a reinsurance arrangement or the insured under an insurance arrangement.

Although, in the case of non-proportional insurance covering a band from R (retention) to U (upper limit), the cedant may be said to retain not only the risk from 0 to R but also the risk above U, it is R that would be termed the retention.

Question 15

Retrocession

Answer 15

Reinsurance purchased by a reinsurer in relation to its inwards reinsurance liabilities

Question 16

Retrocessionaire

Answer 16

A reinsurer that accepts reinsurance from another reinsurer

Question 17

Risk-attaching basis

Answer 17

A basis under which reinsurance is provided for claims arising from policies commencing during the period to which the reinsurance relates, irrespective of when the claims are incurred or reported

Question 18

Treaty reinsurnace

Answer 18

Reinsurance that a reinsurer is obliged to accept, subject to conditions set out in a treaty

Question 19

Direct writer

Answer 19

An insurer providing cover directly to the insured policyholder, as distinct from a reinsurer. Also referred to as a primary insurer

Question 20

Retrocedant

Answer 20

The ceding reinsurer in a retrocession agreement

Question 21

Reasons for purchasing reinsurance

Answer 21

> Limitation of exposure to risk or spreading of risk
Avoidance of large single losses
Smoothing of results
Increasing profitability
Improving solvency margin
Increasing capacity to accept risk
Financial assistance
Availability of expertise

Question 22

Factors affecting an insurer’s appetite to limit risk

Answer 22

> Size of the insurer: Larger insurers -> larger free reserves -> less need for reinsurance
Insurer’s experience in the marketplace: More experience -> better data -> better pricing of risk -> less need for reinsurance
Insurer’s available free assets: Larger free assets -> cushion to absorb unexpected losses -> less need for reinsurance
Size of insurer’s portfolio: Larger the portfolio -> more credible claims experience -> less need for reinsurance
Range within which the business outcome (or profit) can be forecast with confidence

Question 23

Benefits of facultative reinsurance

Answer 23

> Both parties have flexibility within the reinsurance process (multiple reinsurers can be approached and the ceding insurer does not have to choose a particular reinsurer, the reinsurer is not under obligation to accept the risk)

Question 24

Disadvantages of facultative reinsurance

Answer 24

> Time consuming and costly exercise to place such risks
No certainty that the required cover will be available when needed
Even if cover is available, the price and terms may be unacceptable
Primary insurer may be unable to accept a large risk until it has been able to find the required reinsurance cover

Question 25

Benefits of treaty reinsurance

Answer 25

> Efficient since risks are reinsured automatically - administratively quicker and cheaper
Certain: with a treaty, the direct insurer knows what reinsurance is available under what terms
Control of solvency and growth requirements is more easily done through treaty reinsurance as it is more certain

Question 26

Retention point

Answer 26

The point above which a reinsurer will cover losses

Question 27

Different types of reinsurance bases

Answer 27

> Policies-incepting basis
Losses-occurring basis
Claims-made basis

Question 28

Different types of reinsurance bases

Answer 28

> Policies-incepting basis (risk-attaching basis)
Losses-occurring basis
Claims-made basis

Question 29

Cash call

Answer 29

A reinsurance contract provision, common in proportional contracts, which allows a reinsured company to make claim and receive immediate payment for a large loss without waiting for the usual periodic payment procedures to occur

Question 29

Cash call

Answer 29

A reinsurance contract provision, common in proportional contracts, which allows a reinsured company to make claim and receive immediate payment for a large loss without waiting for the usual periodic payment procedures to occur