Chapter 8

Question 1

Reinsurance

Answer 1

the transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium to indemnify another insurer for some of all the financial consequences of certain loss exposures covered by the primary’s insurance policies

Question 2

Primary insurer

Answer 2

the insurer that transfers or cedes all or part of the insurance risk it has assumed to another insurer in a contractual arrangement

Question 3

Reinsurer

Answer 3

the insurer that assumes some or all of the potential costs of insured loss exposures of the primary insurer in a reinsurance contractual agreement

Question 4

Reinsurance agreement

Answer 4

contract between the primary insurer and reinsurer that stipulates the form of reinsurance and the type of accounts to be reinsured

Question 5

Insurance risk

Answer 5

uncertainty about the adequacy of insurance premiums to pay losses

Question 6

Retention

Answer 6

the amount retained by the primary insurer in the reinsurance transaction

Question 7

Reinsurance premium

Answer 7

the consideration paid by the primary insurer to the reinsurer for assuming some or all of the primary insurer’s insurance risk

Question 8

Ceding commission

Answer 8

an amount paid bu the reinsurer to the primary insurer to cover part or all of the primary insurer’s policy acquisition expenses

Question 9

Retrocession

Answer 9

a reinsurance agreement whereby one reinsurer (the retrocedent) transfers all or part of the reinsurance risk it has assumed or will assume to another reinsurer (the retrocessionaire)

Question 10

Retrocedent

Answer 10

the reinsurer that transfers or cedes all or part of the insurance risk it has assumed to another reinsurer

Question 11

Retrocessionaire

Answer 11

the reinsurer that assumes all or part of the reinsurance risk accepted by another reinsurer

Question 12

Reinsurance functions

Answer 12

• Increase large-line capacity
• Provide catastrophe protection
• Stabilize loss experience
• Provide surplus relief
• Facilitate withdrawal from a market segment
• Provide underwriting guidance

Question 13

Large-line capacity

Answer 13

an insurer’s ability to provide larger amounts of insurance for property loss exposures or higher limits of liability for liability loss exposures, than it is otherwise willing to provide

Question 14

Line

Answer 14

the max amount of insurance or limit of liability that an insurer will accept on a single loss exposure

Question 15

Surplus relief

Answer 15

a replenishment of policyholders’ surplus provided by the ceding commission paid to the primary insurer

Question 16

Portfolio reinsurance

Answer 16

reinsurance that transfers to the reinsurer liability for an entire type of insurance, territory, or book of business after the primary insurer has issued the polices

Question 17

Novation

Answer 17

an agreement under which one insurer or reinsurer is substituted for another

Question 18

Professional reinsurer

Answer 18

an insurer whose primary business purpose is serving other insurer’s reinsurance needs

Question 19

Direct writing reinsurer

Answer 19

a professional reinsurer whose employees deal directly with primary insurers

Question 20

Reinsurance intermediary

Answer 20

an intermediary that works with primary insurers to develop reinsurance programs and that negotiates contracts of reinsurance btw the primary insurer and reinsurer, receiving commission for placement and other services rendered

Question 21

Reinsurance pools, syndicates, and associations

Answer 21

groups of insurers that share the loss exposures of the group, usually through reinsurance

Question 22

Pool

Answer 22

a reinsurance association that consists of several unrelated insurers or reinsurers that have joined to insure risks the individual members are unwilling to individually insure

Question 23

Syndicate

Answer 23

a group of insurers or reinsurer involved in joint underwriting to insure major risks that are beyond the capacity of a single insurer or reinsurer, each syndicate member accepts predetermined shares of premiums, losses, expenses, and profits

Question 24

Association

Answer 24

an organization of member companies that reinsure by fixed percentage the total amount of insurance appearing on policies issued by the org

Question 25

Adverse selection

Answer 25

the decision to reinsure those loss exposures that have an increased probability of loss because the retention of those loss exposures in undesirable

Question 26

Facultative certificate of reinsurance

Answer 26

an agreement that defines the terms of the facultative reinsurance coverage on a specific loss exposure

Question 27

Pro rata reinsurance

Answer 27

the primary insurer and reinsurer proportionately share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses)

Question 28

Flat commission

Answer 28

a ceding commission that is a fixed percentage of the ceded premiums

Question 29

Profit sharing commission

Answer 29

a ceding commission that is contingent on the reinsurer realizing a predetermined percentage of excess profit on ceded loss exposures

Question 30

Sliding scale commission

Answer 30

a ceding commission based on a formula that adjusts the commission according to the profitability of the reinsurance agreement

Question 31

Quota share reinsurance

Answer 31

a type of pro rata reinsurance in which the primary insurer and the reinsurer share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) using a fixed percentage

Question 32

Variable quota share treaty

Answer 32

a quota share reinsurance treaty in which the cession percentage retention varies based on specified pre-determined criteria such as the amount of insurance needed

Question 33

Loss ratio

Answer 33

a ratio that measures losses and loss adjustment expenses against earned premiums and that reflects the percentage of premiums being consumed by losses

Question 34

Surplus share reinsurance

Answer 34

a type of pro rata reinsurance in which the policies covered are those whose amount of insurance exceeds a stipulated dollar amount, or line

Question 35

Reinsurance limit

Answer 35

the max amount that the reinsurer will pay for a claim and that is commonly stated in the reinsurance agreement

Question 36

Excess of loss reinsurance

Answer 36

nonproportional; the primary insurer is indemnified for losses that exceed a specified dollar amount

Question 37

Attachment point

Answer 37

the dollar amount above which the reinsurer responds to losses

Question 38

Subject premium

Answer 38

the premium the primary insurer charges on its underlying policies and to which a rate is applied to determine the reinsurance premium

Question 39

Working cover

Answer 39

an excess of loss reinsurance agreement with a low attachment point

Question 40

Per risk excess of loss reinsurance

Answer 40

a type of excess of loss reinsurance that covers property insurance and that applies separately to each loss occurring to each risk

Question 41

Catastrophe excess of loss reinsurance

Answer 41

a type of excess of loss reinsurance that protects the primary insurer from an accumulation of retained losses that arise from a single catastrophic event

Question 42

Co-participation provision

Answer 42

a provision in reinsurance agreement that requires the primary insurer to retain a specified percentage of the losses that exceed its attachment point

Question 43

Per policy excess of loss reinsurance

Answer 43

a type of excess of loss reisurance that applies the attachment point and the reinsurance limit separately to each insurance policy issued by the primary insurer regardless of the number of losses occurring under each policy

Question 44

Per occurrence excess of loss reinsurance

Answer 44

a type of excess of loss reinsurance that applies the attachment point and reinsurance limit to the total losses arising from a single event affecting one or more of the primary insurer’s policies

Question 45

Aggregate excess of loss reinsurance

Answer 45

a type of excess of loss reinsurance that covers aggregated losses that exceed the attachment point, stated as a dollar amount of loss or as a loss ratio, and that occur over a specified period, usually one year

Question 46

Finite risk reinsurance

Answer 46

a nontraditional type of reinsurance in which the reinsurer’s liability is limited and anticipated investment income is expressly acknowledged as an underwriting component

Question 47

Capital market

Answer 47

a financial market in which long term securities are traded

Question 48

Securitization of risk

Answer 48

the use of securities or financial instruments (stocks, bonds) to finance an insurer’s exposure to catastrophic loss

Question 49

Special purpose vehicle

Answer 49

a facility established for the purpose of purchasing income producing assets from an organization, holding title to the, and then using those assets to collateralize securities that will be sold to investors

Question 50

Insurance derivative

Answer 50

financial contract whose value is based on the level of insurable losses that occur during a specific time period

Question 51

Contingent capital arrangement

Answer 51

an agreement entered into before any losses occur, that enables an org. to raise cash by selling stock or issuing debt at prearranged terms after a loss occurs that exceeds a certain threshold

Question 52

Insurance linked security

Answer 52

a financial instrument whose value is primarily driven by insurance and/or reinsurance events

Question 53

Surplus note

Answer 53

a type of unsecured debt instrument issued only by insurers, that has characteristics of both conventional equity and debt securities and is classified as policyholders’ surplus rather than as a liability on the insurer’s statutory balance sheet

Question 54

Strike price

Answer 54

the price at which the stock or commodity underlying a call option (such as a warrant) or a put option can be purchased (called) or sold (put) during a specified period

Question 55

Reinsurance program

Answer 55

the combo of reinsurance agreements that a primary insurer purchases to meet its reinsurance needs

Question 56

Underwriting risk

Answer 56

a measure of the loss volatility of the types of insurance sold by an insurer