Chapter 8 Flashcards
Reinsurance
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
Primary insurer
the insurer that transfers or cedes all or part of the insurance risk it has assumed to another insurer in a contractual arrangement
Reinsurer
the insurer that assumes some or all of the potential costs of insured loss exposures of the primary insurer in a reinsurance contractual agreement
Reinsurance agreement
contract between the primary insurer and reinsurer that stipulates the form of reinsurance and the type of accounts to be reinsured
Insurance risk
uncertainty about the adequacy of insurance premiums to pay losses
Retention
the amount retained by the primary insurer in the reinsurance transaction
Reinsurance premium
the consideration paid by the primary insurer to the reinsurer for assuming some or all of the primary insurer’s insurance risk
Ceding commission
an amount paid bu the reinsurer to the primary insurer to cover part or all of the primary insurer’s policy acquisition expenses
Retrocession
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)
Retrocedent
the reinsurer that transfers or cedes all or part of the insurance risk it has assumed to another reinsurer
Retrocessionaire
the reinsurer that assumes all or part of the reinsurance risk accepted by another reinsurer
Reinsurance functions
- Increase large-line capacity
- Provide catastrophe protection
- Stabilize loss experience
- Provide surplus relief
- Facilitate withdrawal from a market segment
- Provide underwriting guidance
Large-line capacity
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
Line
the max amount of insurance or limit of liability that an insurer will accept on a single loss exposure
Surplus relief
a replenishment of policyholders’ surplus provided by the ceding commission paid to the primary insurer
Portfolio reinsurance
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
Novation
an agreement under which one insurer or reinsurer is substituted for another
Professional reinsurer
an insurer whose primary business purpose is serving other insurer’s reinsurance needs
Direct writing reinsurer
a professional reinsurer whose employees deal directly with primary insurers
Reinsurance intermediary
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
Reinsurance pools, syndicates, and associations
groups of insurers that share the loss exposures of the group, usually through reinsurance
Pool
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
Syndicate
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
Association
an organization of member companies that reinsure by fixed percentage the total amount of insurance appearing on policies issued by the org
Adverse selection
the decision to reinsure those loss exposures that have an increased probability of loss because the retention of those loss exposures in undesirable
Facultative certificate of reinsurance
an agreement that defines the terms of the facultative reinsurance coverage on a specific loss exposure
Pro rata reinsurance
the primary insurer and reinsurer proportionately share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses)
Flat commission
a ceding commission that is a fixed percentage of the ceded premiums
Profit sharing commission
a ceding commission that is contingent on the reinsurer realizing a predetermined percentage of excess profit on ceded loss exposures
Sliding scale commission
a ceding commission based on a formula that adjusts the commission according to the profitability of the reinsurance agreement
Quota share reinsurance
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
Variable quota share treaty
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
Loss ratio
a ratio that measures losses and loss adjustment expenses against earned premiums and that reflects the percentage of premiums being consumed by losses
Surplus share reinsurance
a type of pro rata reinsurance in which the policies covered are those whose amount of insurance exceeds a stipulated dollar amount, or line
Reinsurance limit
the max amount that the reinsurer will pay for a claim and that is commonly stated in the reinsurance agreement
Excess of loss reinsurance
nonproportional; the primary insurer is indemnified for losses that exceed a specified dollar amount
Attachment point
the dollar amount above which the reinsurer responds to losses
Subject premium
the premium the primary insurer charges on its underlying policies and to which a rate is applied to determine the reinsurance premium
Working cover
an excess of loss reinsurance agreement with a low attachment point
Per risk excess of loss reinsurance
a type of excess of loss reinsurance that covers property insurance and that applies separately to each loss occurring to each risk
Catastrophe excess of loss reinsurance
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
Co-participation provision
a provision in reinsurance agreement that requires the primary insurer to retain a specified percentage of the losses that exceed its attachment point
Per policy excess of loss reinsurance
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
Per occurrence excess of loss reinsurance
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
Aggregate excess of loss reinsurance
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
Finite risk reinsurance
a nontraditional type of reinsurance in which the reinsurer’s liability is limited and anticipated investment income is expressly acknowledged as an underwriting component
Capital market
a financial market in which long term securities are traded
Securitization of risk
the use of securities or financial instruments (stocks, bonds) to finance an insurer’s exposure to catastrophic loss
Special purpose vehicle
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
Insurance derivative
financial contract whose value is based on the level of insurable losses that occur during a specific time period
Contingent capital arrangement
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
Insurance linked security
a financial instrument whose value is primarily driven by insurance and/or reinsurance events
Surplus note
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
Strike price
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
Reinsurance program
the combo of reinsurance agreements that a primary insurer purchases to meet its reinsurance needs
Underwriting risk
a measure of the loss volatility of the types of insurance sold by an insurer
