Chapter 8: Reinusrance Principles And Concepts

Question 1

Reinsurance Functions

Answer 1

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

Question 2

Stabilize Loss Experience

Answer 2

• Limit its liability for a single loss exposure
• Limit its liability for several loss exposures affected by a common event
• Limit its liability for loss Exposure that aggregate claims over time

Question 3

Provide Surplus Relief

Answer 3

For accounting purposes, expenses are recognized at the time a new policy is sold, however, premiums are recognized as revenue as they are earned over the policy’s life.

Question 4

Facilitate Withdrawal from a Market Segment

Answer 4

When withdrawing from a market segment, the primary insurer base these option:

• Stop writing new insurance policies and continue in-force insurance until all policies expire (often referred to as “run-off”)
• Cancel all policies (if regulations permit) and refund the unearned premiums to insured
• Withdraw from the market segment by purchasing portfolio reinsurance

Question 5

Reinsurance Sources

Answer 5

Reinsurance can be purchased from three sources:

• Professional reinsurers
• Reinsurance departments of primary insurers
• Reinsurance pools, syndicates, and associations

Question 6

Reinsurance Professional and Trade Associations

Answer 6

• Intermediaries and Reinsurance Underwriters Association (IRU)
• Brokers & Reinsurance Markets Association (BRMA)
• Reinsurance Association of America (RAA)

Question 7

Reinsurance Transactions

Answer 7

• Treaty Reinsurance
  
  • Uses one agreement for an entire class or portfolio of loss exposures and is also referred to as obligatory reinsurance
• Facultative Reinsurance
  
  • Uses a separate reinsurance agreement for each loss Exposure it wants to reinsure and is also referred to as nonobligatory reinsurance

Question 8

Types of Pro Rata and Excess of Loss Reinsurance

Answer 8

• Pro rata reinsurance
  
  • Quota share reinsurance
  • Surplus share reinsurance
• Excess of loss reinsurance
  
  • Per risk excess of loss reinsurance
  • Catastrophe excess of loss
  • Per policy excess of loss reinsurance
  • Per occurrence excess of loss reinsurance
  • Aggregate excess of loss reinsurance

Question 9

Alternatives to Traditional Reinsurance

Answer 9

• Finite risk reinsurance
• Capital market alternatives to traditional and non traditional reinsurance
  • Catastrophe bond
  • Catastrophe risk exchange
  • Contingent surplus note
  • Industry loss warranty (ILW)
  • Catastrophe option
  • Line of credit
  • Sidecar

Question 10

Factors Affecting Reinsurance Needs

Answer 10

• Growth plans
• Types of Insurance sold
• Geographic spread of loss exposure
• Insurer size
• Insurer structure
• Insurer financial strength
• Senior management’s risk tolerance

Question 11

Factors Affecting Retention Selection

Answer 11

• Maximum amount the primary insurer can retain
• Maximum amount the primary insurer wants to retain
• Minimum retention sought by the reinsurer
• Co-participation provision

Question 12

Maximum Amount the Primary Insurer Can Retain

Answer 12

• Regulatory requirements

- The primary insurer’s financial strength

Question 13

Factors Affecting Reinsurance Limit Selection

Answer 13

• Maximum policy limit
• Extra-contractual obligations
• Loss adjustment expenses
• Clash cover
• Catastrophe exposure