Chapter 6: Reinsurance products - types Flashcards
Quota share
A proportional treaty reinsurance whereby the premiums and claims for all risks covered by the treaty are split in a fixed proportion.
Commissions payable under a quota share agreement
The reinsurer pays return and override commission to the insurer.
Profit commission may also be payable.
Return commission
The reinsurer will reimburse the direct writer with some percentage of the premium to help cover the acquisition expenses.
Override Commission
Commission over and above the return commission, compensating the direct writer for attracting and administering the business.
Ceding commission
The sum of return and override commission.
Profit commission
Commission the reinsurer pays the direct writer as a reward for passing on good business.
4 Advantages of quota share
- It spreads risk, increasing insurer’s capacity and encouraging reciprocal business
- Directly improves the solvency ratio (without losing market share)
- It is administratively simple
- may provide commission that helps with cashflow
Solvency ratio
free assets divided by net written premiums.
4 Disadvantages of quota share reinsurance
- Cedes the same proportion of low and high variance risks
- cedes the same proportion of risks, irrespective of size
- passes a share of any profit to the reinsurer
- it is unsuitable for unlimited covers
Surplus reinsurance
A proportional treaty reinsurance, whereby the proportion of risk covered varies from risk to risk depending on the size and type of risk.
Define “Estimated Maximum Loss (EML)”
The largest loss that is reasonably expected to arise from a single risk.
Define Minimum retention
The minimum level of retention the reinsurer requires to prevent the insurer from having too little interest in the risk.
This requires the insurer to retain all risks that fall below the minimum retention.
Define Number of lines of cover
This is specified in the contract and is used to calculate the maximum cover available from the reinsurer.
The maximum cover available is calculated as L multiplied by R, the Maximum retention
What is the main difference between quota share and surplus reinsurance?
Whereas quota share has the same proportion of every risk ceded to the reinsurer, the proportion ceded will vary from risk to risk with surplus reinsurance.
5 Advantages of surplus reinsurance
- Enables the insurer to choose within limits, the risk that it wants to retain. helps in avoiding accumulations and fine-tune its exposure
- Enables the insurer to write larger risks
- It is useful for those classes where a wide variation can occur in the size of risks
- It helps spread the risks
- The commission may help with cashflow
3 Disadvantages of Surplus reinsurance
- It requires more complex administration
- It is unsuitable for unlimited covers (liability) and personal lines cover
- The terms may not be flexible enough to cover the largest risks
Excess of loss reinsurance
With XL reinsurance, the reinsurer agrees to indemnify the cedant for the amount of any loss above a stated excess point. More usually, the reinsurer will give cover up to a stated upper limit, with the insurer purchasing further layers of XL cover – which stack on top of the primary layer – from different reinsurers.
The retention and limits may be indexed for inflation
The higher layer cover(s) come into operation only when the lower layer cover has been fully used (“burnt through”).
3 Main types of excess of loss reinsurance
- Risk XL
- Aggregate XL
- Catastrophe XL
Risk XL
Indemnifies an insurer for the amount of an individual loss in excess of the excess point - in return for a premium.
Aggregate XL
Relates to cumulative losses, where the aggregation may be by event, by peril or by class.