Chapter 5 - Reinsurance Products (Background) Flashcards
Ceding Company (Cedant)
An insurer or reinsurer that passes (or cedes) a risk to a reinsurer
Facultative-obligatory reinsurance
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
Facultative reinsurance
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
Inwards reinsurance
Reinsurance business accepted or written by an insurer or reinsurer, as opposed to outwards reinsurance which is ceded to a reinsurer
Letter of credit
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
Losses occurring (or losses occurring during) policy
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
Net premium
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
Non-proportional reinsurance
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
Outwards reinsurance
Reinsurance ceded by an insurer or reinsurer, as opposed to inwards reinsurance, which is reinsurance accepted
Primary insurer
An insurer providing cover directly to the insured policyholder, as distinct from a reinsurer. Also referred to as a direct writer
Proportional reinsurance
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
Reciprocity
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
Replacement
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’
Retention
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.
Retrocession
Reinsurance purchased by a reinsurer in relation to its inwards reinsurance liabilities
Retrocessionaire
A reinsurer that accepts reinsurance from another reinsurer
Risk-attaching basis
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
Treaty reinsurnace
Reinsurance that a reinsurer is obliged to accept, subject to conditions set out in a treaty
Direct writer
An insurer providing cover directly to the insured policyholder, as distinct from a reinsurer. Also referred to as a primary insurer
Retrocedant
The ceding reinsurer in a retrocession agreement
Reasons for purchasing reinsurance
> 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
Factors affecting an insurer’s appetite to limit risk
> 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
Benefits of facultative reinsurance
> 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)
Disadvantages of facultative reinsurance
> 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
Benefits of treaty reinsurance
> 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
Retention point
The point above which a reinsurer will cover losses
Different types of reinsurance bases
> Policies-incepting basis
Losses-occurring basis
Claims-made basis
Different types of reinsurance bases
> Policies-incepting basis (risk-attaching basis)
Losses-occurring basis
Claims-made basis
Cash call
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
Cash call
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
