Chapter 6 - Reinsurance Products (Types)

Question 1

Adverse development cover

Answer 1

A reinsurance arrangement whereby a reinsurer agrees, in return for a premium, to cover the ultimate settled amount of a specified block of business above a certain pre-agreed amount

Question 2

Aggregate excess of loss reinsurance

Answer 2

A form of excess of loss reinsurance that covers the aggregate of losses, above an excess point and subject to an upper limit, sustained from a single event or from a defined peril (or perils) over a defined period, usually one year

Question 3

Balance of a reinsurance treaty

Answer 3

The ratio of total premiums receivable by a reinsurer under a surplus treaty to the reinsurer’s maximum liability for any one claim, based on estimated (or expected) maximum loss (EML)

Question 4

Catastrophe reinsurance

Answer 4

A form of aggregate excess of loss reinsurance providing coverage for very high aggregate losses arising from a single event, that may be spread over a number of hours; 24 or 72 hour periods that are commonly used.

Question 5

Direct business

Answer 5

In the context of reinsurance:
It is the cover provided by an insurer to an original policyholder (as opposed to any reinsurance cover provided for the reinsurer)
Note that it can also mean:
Business acquired without the intervention of an intermediary

Question 6

Excess of loss (XL or XoL) reinsurance

Answer 6

A form of reinsurance whereby the reinsurer indemnifies the cedant for the amount of a loss above a stated excess point, usually up to an upper limit. The excess point and upper limit may be fixed, or indexed as specified in a stability clause. Usually this type of reinsurance relates to individual losses, but it can be a form of aggregate excess of loss reinsurance covering the total of all losses in a period and subject to a total aggregate claim limit

Question 7

Experience account

Answer 7

Often a feature of multi-year financial engineering contracts, this is an account that tracks the performance of the business reinsured by the treaty so that the profitability or otherwise of the treaty can be determined

Question 8

Financial risk reinsurance/ Finite risk insurance

Answer 8

A form of reinsurance involving less underwriting risk transfer and more investment or timing risk transfer from the cedant than is customary in reinsurance

Question 9

Financial engineering

Answer 9

Financial engineering contracts are contracts generally characterised as ones that attempt to improve a company’s balance sheet but with little or no transfer of risk

Question 10

Hours clause

Answer 10

A clause within a catastrophe reinsurance treaty that specifies the limited period during which claims can be aggregated for the purpose of one claim on the reinsurance contract. Commonly 24 or 72 hours are used.

Question 11

LMX on LMX

Answer 11

Excess of loss reinsurance provided for syndicates or companies operating in the London Market in respect of London Market excess of loss (LMX) business written by them. This is a form of retrocession business.

Question 12

London Market excess of loss (LMX)

Answer 12

Excess of loss reinsurance provided for syndicates or companies operating in the London Market

Question 13

LMX spiral

Answer 13

The concentration of risk that occurred prior to the mid-1990s when, through the writing of retrocession business (particularly LMX on LMX business), insurers unwittingly ended up reinsuring themselves

Question 14

Loss portfolio transfer

Answer 14

An arrangement whereby the total liabilities in respect of a specified book of business is passed in its entirety from one insurance entity to another.

Question 15

Original gross premium income (OGPI)

Answer 15

The gross premium income received by an insurer in relation to business that is covered by a non-proportional reinsurance treaty. The reinsurance premium is calculated as a percentage of this OGPI

Question 16

Over-riding commission

Answer 16

Additional commission paid by a reinsurer to an insurer ceding proportional business, as a contribution towards expenses and profit over and above the return commission. The term is often used on primary business written through agents or brokers and refers to any addition to basic commission rates either for volume or for profitable business.

Question 17

Profit commission

Answer 17

Commission paid by a reinsurer to a cedant under a proportional reinsurance treaty that
is dependent upon the profitability of the total business ceded during each accounting
period.

Question 18

Probable maximum loss (PML)

Answer 18

An attempt to quantify exposure, used in rating or to judge requirements for outwards reinsurance. It may be used as another term for EML, depending on the class of business.

Question 19

Quota share reinsurance

Answer 19

A form of proportional reinsurance where the proportions used in apportioning claims and premiums between the insurer and reinsurer are constant for all risks covered by the treaty

Question 20

Rate on line

Answer 20

For non-proportional reinsurance, the total premium charged (ignoring reinstatement premiums) for the reinsurance divided by the width of the layer covered.

Question 21

Reinstatement

Answer 21

The restoration of full cover following a claim. In non-proportional reinsurance, a reinstatement premium is sometimes required following a claim that breaches the deductible on the reinsurance treaty. There may, however, be a number of free reinstatements

Question 22

Return commission

Answer 22

Commission paid by a reinsurer to an insurer ceding proportional business, as a contribution towards expenses and profit.

Question 23

Risk excess of loss reinsurance

Answer 23

Excess of loss reinsurance that relates to individual losses affecting only one insured risk at any one time

Question 24

Clash cover

Answer 24

Excess of loss reinsurance cover, limiting an insurer’s exposure to the risk that one claim incidence gives rise to claims on more than one policy insured by the insurer

Question 25

Stability clause

Answer 25

A clause that may be included in a non-proportional reinsurance treaty, providing for the indexation of monetary limits (that is the excess point and/ or the upper limit) in line with a specified index of inflation

Question 26

Stop loss reinsurance

Answer 26

An aggregate excess of loss reinsurance that provides protection based on the total claims, from all perils, arising in a class or classes over a period. The excess point and the upper limit are often expressed as a percentage of the cedant’s premium income rather than in monetary terms

Question 27

Surplus reinsurance

Answer 27

A form of proportional reinsurance where the proportions are determined by the cedant for each individual risk covered by the treaty, subject to limits defined in the treaty

Question 28

Time and distance reinsurance

Answer 28

A type of financial reinsurance that had widespread use in the London Market and Lloy’s, whereby an insurer pays a single premium in return for a fixed schedule of future payments matched to the estimated dates and amounts of the insurer’s claim outgo. The purpose of such contracts was to achieve the effect of discounting in arriving at the reserves for outstanding claims. Since Lloyd’s changed its rules so that the credit allowed for time and distance policies in a syndicate’s accounts was limited to
the present value, such policies have become less popular.

Question 29

Working layer

Answer 29

A layer of excess of loss reinsurance where the deductible is at a low enough level for it to be likely to experience a fairly regular flow of claims. The first layer above the cedant’s excess point where moderate to heavy loss activity is expected by the cedant and reinsurer

Question 30

Advantages of quota share reinsurance

Answer 30

> Spreads risk and enables insurers to write larger portfolios of risk and encourages reciprocal business
Directly helps improve the solvency ratio and helps the insurer to satisfy the statutory solvency requirement
Administratively simple
Commission may help with cashflow

Question 31

Disadvantages of quota share

Answer 31

> Inflexible as it cedes the same proportion of low-variance and high-variance risks
Cedes the same proportion of each risk, irrespective of size. Not good at protecting against catastrophes or very large claims
Passes a share of any profit to the reinsurer

Question 32

Minimum retention

Answer 32

The minimum level of retention that the reinsurer requires to prevent the insurer from having too little interest in the risk. The insurer retains all risks that fall below the minimum retention

Question 33

Maximum retention

Answer 33

Usually denoted R. This is the maximum level of retention for any risk to be included in a treaty and will be specified in the treaty

Question 34

Number of lines covered

Answer 34

Usually denoted L. This is specified in the contract and is used to calculate the maximum cover available from the reinsurer (L x R).

Question 35

Advantage of surplus reinsurance

Answer 35

> Enables an insurer to write larger risks
Enables the insurer to choose, within limits, the size of risks that it will retain
It’s useful for classes where a wide variation can occur in the size of risks
Helps to spread the risks
Commission may help with cashflow

Question 36

Disadvantages of surplus reinsurance

Answer 36

> Administration is more complicated than for quota share
Unsuitable for unlimited covers and personal lines cover where potential losses are small compared to the insurer’s resources
Treaty terms may not be flexible enough so it may not cover the largest risks without the need for extra negotiation

Question 37

Types of excess of loss (XL) reinsurance

Answer 37

> Risk XL
Aggregate XL
Catastrophe XL

Question 38

Advantages of excess of loss (XoL) reinsurance

Answer 38

> Allows an insurer to accept risks that could lead to large claims
Reduces the risk of insolvency from a catastrophe, a large claim or an aggregation of claims
Stabilises the technical results of the insurer by reducing claim fluctuations
Helps make more efficient use of the capital by reducing the variance of the claim payments

Question 39

Disadvantages of excess of loss (XoL) reinsurance

Answer 39

> If priced correctly by the reinsurer, the reinsurance premium paid by the insurer will be greater than the expected recoveries under the treaty since the reinsurer has loaded the premium for expenses, profit and contingency margins

Question 40

Pre-funded finite risk reinsurance

Answer 40

A financial reinsurance arrangement whereby the insurer pays premiums into a fund held by the reinsurer (which earns interest) and claims are paid from the fund

Question 41

Post-funded finite risk reinsurance

Answer 41

A financial reinsurance arrangement whereby the reinsurer pays the losses and the insurer pays back the losses over time

Question 42

Types of financial reinsurance

Answer 42

> Time and distance deals
Spread loss covers
Financial quota share
Industry loss warranties

Question 43

Financial quota share

Answer 43

A traditional quota share arrangement that is written for the primary purpose of a financial arrangement involving the commission payment.Financing is achieved by overcompensating in the initial period and undercompensating in periods thereafter