Chapter 6 - Reinsurance Products (Types) Flashcards
Adverse development cover
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
Aggregate excess of loss reinsurance
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
Balance of a reinsurance treaty
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)
Catastrophe reinsurance
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.
Direct business
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
Excess of loss (XL or XoL) reinsurance
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
Experience account
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
Financial risk reinsurance/ Finite risk insurance
A form of reinsurance involving less underwriting risk transfer and more investment or timing risk transfer from the cedant than is customary in reinsurance
Financial engineering
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
Hours clause
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.
LMX on LMX
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.
London Market excess of loss (LMX)
Excess of loss reinsurance provided for syndicates or companies operating in the London Market
LMX spiral
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
Loss portfolio transfer
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.
Original gross premium income (OGPI)
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
Over-riding commission
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.
Profit commission
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.
Probable maximum loss (PML)
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.
Quota share reinsurance
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
Rate on line
For non-proportional reinsurance, the total premium charged (ignoring reinstatement premiums) for the reinsurance divided by the width of the layer covered.
Reinstatement
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
Return commission
Commission paid by a reinsurer to an insurer ceding proportional business, as a contribution towards expenses and profit.
Risk excess of loss reinsurance
Excess of loss reinsurance that relates to individual losses affecting only one insured risk at any one time
Clash cover
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
Stability clause
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
Stop loss reinsurance
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
Surplus reinsurance
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
Time and distance reinsurance
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.
Working layer
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
Advantages of quota share reinsurance
> 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
Disadvantages of quota share
> 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
Minimum retention
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
Maximum retention
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
Number of lines covered
Usually denoted L. This is specified in the contract and is used to calculate the maximum cover available from the reinsurer (L x R).
Advantage of surplus reinsurance
> 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
Disadvantages of surplus reinsurance
> 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
Types of excess of loss (XL) reinsurance
> Risk XL
Aggregate XL
Catastrophe XL
Advantages of excess of loss (XoL) reinsurance
> 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
Disadvantages of excess of loss (XoL) reinsurance
> 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
Pre-funded finite risk reinsurance
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
Post-funded finite risk reinsurance
A financial reinsurance arrangement whereby the reinsurer pays the losses and the insurer pays back the losses over time
Types of financial reinsurance
> Time and distance deals
Spread loss covers
Financial quota share
Industry loss warranties
Financial quota share
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