Chapter 9 Flashcards
Life insurance industry is built around concepts involving the transfer of financial risks. The transfer of risk provides what two basic benefits?
- death benefit offsets by any fianancial loss incurred by the beneficiary due to the death of the insured,
- payments made tot eh life insurance policy help stabalize the financial obligations of the policy owner. The policy owner is responsible for a series of relatively small, ongoing, regularly- scheduled premium payments instead of single, large, lump-sum benefit payements due to an unknown future date.
Define reinsurance
Reinsurance is the transfer of part of the hazards or risk that a direct insurer assumes by way of insurance contract or legal provision on behalf of an insred to a second insurance carrier, the reinsurer, who has no direct contractural relationship wihti the insured.
Most reinsurance arrangements are “indemnity” arrangements. What is this?
one of the key provisions is that there is no contractual relationship between the insured and the reinsurers.
The reinsurer is not obligated to make payments to the beneficiary, but to the direct carrier only. The direct carrier is ALWAYS obligateed to pay a legitimate claim.
Define: ceding company
the company that transfers its risk to a reinsurer. A cession is the document or electronic transmittal that describes the risk transferred, usually on an individual policy level.
define: reinsurance tready
is the written contract defining the reinsurance agreement. the ready defines the relationship between the ceding company and the reinsurance, the business to be covered under the tready, the reinsurance to be provided and its cost.
define a retention limit
the specified max amount of insurance that a life insurer is willing to carry at its own risk, on any one life
Define Retrocessionaire or “retro”
is a reinsurer that contractually accepts risk from another reinsurer.
- a retrocession is the risk ceded by a reinsurer to the retrocessionaire.
What the 5 broad benefits of working with reinsurance?
- capacity
- prevention of catastrophic loss
- Market Entrance
- Market Withdrawal
- Reinsurance services
All insurance companies have constraints places on their ability to issue insurance.
One constraint is the retention limit. Define how they vary.
- from amounts and are often a function of the company’s size and financial resources, with larger comapnies they have larger limits. They can vary this limits based on a selection criteria such as age, underwriting classifications, or plan type.
how can a reinsurer help small insurance companies?
through increasing retention limits, the reinsurers allow a company to issue higher faceamount than the company retention limit, and they can help them grow and succeed.
How does reinsurance prevent catastrophic loss?
an large individual contract can be reinsurerd, allowing the direct carrier to recoup some or all, of the claim.
- using RI allows a direct writing company to spread the risk among other insurance carriers.
True or False
the more risk spread amount various insurers, reinsurers, and retrocessionaires, the less impact any single claim will have on any single company and the more financially stable the reinsurance arrangement will be.
True
thats why direct carries will sometimes ask several reinsurers to participate ina reinsurance treaty insread of electing to rely on a single company.
What is a reinsurance pool?
when several reinsurers share the reinsurance coverage on the same risk.
A direct writing company is subject to additional risks when entering a new insurance market or introducing a new product. How can a RI help with this?
- Direct insure may not have the expertise. Veteran reinsurers have contracts through the industry and their knowledge can be used.
- until a large number of policies is ussed, the mortability of that block of business may not be as expected. the RI they can keep the direct carrier from the effects of volatile mortability until the # of policies increases and mortality is more predictable
- each claim has a high financial impact when only a few policies are in force. When using RI for these polciies, means that each claim affects the cede company less.
Insurance mortality is based on the statistical “law of large numbers”. what is this?
The law of large numbers states that the greater the number of occurances that take place:
1) the more accurate the prediction of future results
2) the less the deviation of the actual losses from the expected losses
3) the more reliable the prediction will be
How can a reinsurance company also benefit the direct writing company that is leaving a particular market?
the direct company can arrange to reinsure or sell outright an entire block of policies to an itnerested reinsurer.
What is assumption reinsurance?
if a direct writing company permanently transfers all of its contractural obligations on the assumed risk to the reinsurer.
What are some additional reinsurance services that a direct company may see when working with a RI>
- assisting comapnies entering new markets
- provide resoures and knowledge that the direct carries may not have in u/w, actuarial science, claims, product development, and policy administrations.
- ie. traninig, conducting and publishing u/w research and making presentations at local, national, and international UW meetings.
Define policy reserves `
an amount of money put aside by the direct carrier to cover actual or potential liabilities owed to policholders. in the event of a claim, the direct carrier uses the cash put aside in the company reserves to make payment on the death claim.
what is the goal of financial reinsurance?
provide reflief to the capital requirements of a direct writing company.
Financial reinsurance covers non-material risks such as what?
- policy persistency
- interest
- cash values
- reserve requirements (as noted)
- secondary guarantees
- return of premiums
Name examples of Mortalikty risk transfer between direct companies and reinsurers.
YRT- excess of retention
YRT- Quota share
coin share
Define YRT (yearly renewable Term)
here the ceding company pays reinsurance premiums to the reinsurer that are based on the age and gender of the insured and duration of the contract.
- premiums usual increase
What happens in a YRT excess of retention arrangements?
the direct carrier will retain amounts up to its retention limit and then use reinsurance.
What happens in a YRT quota share.
premiums and losses are shared proportionately between the ceding company and the reinsurer.
- allows the use of reinsurance before the company retention is exhausted. the direct company retains a fixed percentage of the risk and cedes the remaining percentage to the insurer.
- first-dollar arrangements or excess of certain amount of retention
What is a first-dollar quota share,
here the company cedes a portion and retains a portion of every dollar of insurance coverage, up to its retention.
what is coinsurance?
a reinsurance arrangement in which the assuming company receives a portions hare of all the risks and cash flows of the policy.
- all the premiums are shared
- requires the reinsurance company to set up admin services that mirro and integrate with that of the ceding company. can be expensive
- good for when ceding company is small and needs RI support,
Name some the types of reinsurance underwrirting arrangements that may exist between direct companies and the reinsurers.
- Faculatative reinsurance
how does facultative reinsurance work?
requires direct carrier to submit the u/w evidence to the RI, and the RI formally approves any reinsurance request before accepting coverage.
- OG method being replaced by auto RI
- used when direct carrier is seeking alternative evaluation or offer on a dec.
When is facultative reinsurance used?
- when the case does not qualigy for auto resinurace under the tready
- the direct carrier cannot place the offer made by its own uws and seeks another u/w offer on the case
- the direct carrier does not want to keep its normal retention on this case.
Define the term “shopping:
when a case is sent for facultative review to more than one reinsurer. The one with the most competitive u/w offer will be selected by the direct company to get the case.
what is the purpose of an automatic reinsurance arrangement
allows direct carries to purchase reinsurance withouy the added time and expense of an underwriting review by the reinsurer.
- direct carrier simply notifies the reinsurer of the amount required and the reisnere complies with the request.
- depends on direct companies u.w decision.
What is the term binding?
the act of the securing automatic reinsurance is also termed binding.
What is the automatic bindings limit?
the max amount a direct writing company is allows to cede automatically
Automatic reinsurance treaties are subject to a number of legal clauses. Name 5.
- the ceding company will keep its regular published retention ro otherwise will hold its full retention on a life under previously issued in force policies .
- the ceding company will apply its normal u/w g/l
- the total of the new amount and the amount already reinsured will not exceed the auto binding limit.
- the amount of insurance in forfce wiht all companies, including the amount to be replaced, plys the amount currently applied for, will not exceed the jumbo limit
- the application must be on a life that has
What is the jumbo limit? [there are 3 definitions]
- amount of insurance in forcev and apploied with all comapnies on an individual
- amount of insurance in force and to be placed with all the companies on an individual
- amount of insurance in force and applied for with all the companies, but excluding controlled replacements, on an individual.
Why was jumbo limit created?
as a means of preventing reinsurnace companies from inadvertly being bound to much on any given individual.
What is an automatic pool?
many companies set up an auto reinsurance arrangement with multiple reinsurers. They consist of few or many reinsures depending on the direct companies business plan and need for capacity.
- reinsurers are usually ceded automatically cases based on their percentage of the pool.
- in past they used alpha split to divide the risk .(rarely used today
What is Faculative-obligatory Reinsurance (Fac-ob)
a hybrid that companies characteroistics of both faculative and automatic reinsurance.
- limited informaiton baout risk is cedeed to the reinsurere.
- useful in situations where the amount applied for exceeds the automatic treaty lomit, but avoids the time and effort of a full falculative review.
what is catastrophe reinsurerance? (cat cover)
a specific type of mortality reinsurance that is used to protect a company agaisnt the short-term earnings impact of incurring multiple large claims at one time. It provides coverage for losses resulting from an accident incolving more than one insured up to a specific limit.
- purchased by a direct company to cover its block of business
what is reinsurance treaty?
the arrangement that details the obligations and responsibilities of the direct carrier and the reinsrer.
- treadies are broken into provisions for specific issues.
What is gthe parties of the aggreement provision?
defines who is a participant in the reinsurance agreement.
FYI the insured is NOT included as a participant
What is the automatic reinsurance prevision?
if inclueded, will specify the conditions under which it will be employed and how the ceding comapny will manage its retention.
What is the Faculative reinsurance?
IF the tready offers facultative reisnurance, this will spevify the conditions under which it can be employed.
- some treaties may also have a clause addressing high profile individuals and athletes.
What is the commencement of liability proivison?
addresses the reinsurers’ ability for a claim and at what point that liability begins.
- for automatic coverage, reinsurance ability will commence at the same time as the ceding comapny’s loability
- for Faculative coverage, reinsurance liability wil commence at the same time as the ceding comapny’s liability , providihng that a valid offer was made by the reinsurer and accpeted by the ceding comapny
- conditional receipt of temporary insurance- this provision outlines the reinsurer’s obligations under the direct writer’s conditional receipt or temp insurance aggrement.
What is the reinsured risk amount provision?
the provision defines the type of Life reinsurance covered by the treaty (YRT reinsurance or coinsurance) and defines any additional policy benefits for which the reinsurer is responsible, outside that of the basic death benefit.
what is the reductions, terminations, and changes provision?
states that all policies increases, risk class changes, and reinstatement will be u/w in accordance with the customary standards and procedures employed by the ceding company. an exception is contracts prev fac shopped.
What is the Conversions, Exchanges, and replacements provisions?
for auto business, these policies will be u/w by the ceeding company in accordance with its own guidelines
Define the claims provision
- copies of “proofs” will be shared with the reinsurer. Includes proof of payment, and death certificate as well as evidence collected in processing a contestable claim
- contestable claims require the reinsurer to submit notification to support (or decline) participation in any action by the ceeding company.
- for misrepresentation or suicide, the reinsure will refund the net reinsurance premiums to the ceding company.
- with the extra-contractural damages, reinsurers will not participate in punitive or compensatory damages but will participate in statutory penalties.
What is the errors and omissions prevision
this clause deals with mistake make by the ceding company or the reinsurer.
What is the dispute resolution provision?
if any disagreement arises between the ceding comapny and reinsurer that cannot be settled, this provision describes the procedure the companies will take. Generally this involves senior managers and company officers who are required to negotiate with eachother in good faith and with a complete disclosure of all the relevant details surrounding the dispute.
What is the arbitation provision?
when a dispute resolution fails, the next stepo is a binding arbitrteation.
describes the process, to include who the arbitators are, and how many there are, and were and when they should meet.
- they base the diecion on the terms and conditions of the treaty and the customs and practives of the RI industires.
what is the “Forms, mannuals, and issue rules” provision?
these include copies of underwriting procedures, forms, guidelines and underwriting manuals, and information about special underwirting programs such as COLI or table-reduction programs.
What is reinsurance pricing?
RI pricing is an actuarial task based ona number of factors including product, market, distribution system and underwriting.
How is product worked into RI pricing?
analysis of the direct company’s products would be comprosed of an actuarial review of the product design, including mortality assumptions, lapse assumptions, expenses, and profit margins.
How is market worked into RI pricing?
nature of market strongly influences the nature of the risk and how stable the mortality is likely to be.
How is the distribution system worked into RI pricing?
success or failure of any insurance product is significantly impacted by the distribution system employed by the direct-writing company.
- the sophistication of the sales force can determine how well a technically complex product is sold.
How is u/w worked into RI pricing?
any attempt at reinsurance pricing will fail without a thorough understanding of the ceeding company’s u/w process. the actuaries must include a review of the following:
- all u/w mannyuals and procedures at the direct comapny.
- all underwriting personnel at the direct company- their level of training, experience and education (to include FALU designations(
- use of the reinsurer’s underwriting manuals, guidelines and training programs.
- results of the underwriting audits and compliance with internal underwriting procedures.
How are RI u/w Audit preformed [ie what areas are typically reviewed]?
- tx of the conditional reciept and any consequent temporary insurance
- compliance with required forms and notice
- adherence to publish u/w rules and practice
- acquisition of age/amount and appropriate additional u/w requirements
- file documentation and use of case referals
- time
- clarity of communication with the field
- eligibility of the case for auto reinsurance and adherence to retenion, jumbo and autobind limits
- final assessment, to include the use of u/w exceptions, concessions and business exceptions
What are u/w RI audit exceptions?
if the reinsurer is auditiong an existing block of bsuiness it has be option of accpeting an exception or error, negotionating a solution or rejecting the cession outrighjt. Recurring exceptions or errors can prompt an investigation into the systemic causes of these problems or even a re-negotiation of the tready itself.
As the reinsurance market has evolved, it has been subjected to increasing pressures by shareholders for higher profits and a greater return on investments. This has produced what effecfts?
- higher RI cost
- more formalized, details, and explicit treaty language.
- increases in u/w and claims audits and a greater emphasis on adhering to underwriting rules and guidelines
What concerns are made by the reinsurance industry senior managers in terms of moving forward?
- concerns over providing excess capacity at an unssystainable price
- development and retention of knowledgable staff
- consistent and profitable risk management
- resistance on the part of direct writers to revise treaty language, data-reporting requirements, and the treatment of u/w errors and exceptions.
- the averse impact of STOLI business, which may undercut the concept of “insurable interrest” and open possibility that life-insurance may lose its tax-advantage status.
define Alphabetical split
method of allocating automatic reinsurance among several reinsueres using the first letter of the insured’s name.
Define assumed risk
the acceptance of a cession by a reinsurer of a retrocession by a retorcessionaire
Define assumption reinsurance.
a reinsurance agreement by which one company permanently transfers full responsibility for a block of policies to another company
define automatic binding limit
the dollar amount of risk on a single or joint life to which a reinsurer is willing to obligate itself without making its own u/w assessment
Define automatic reinsurance
form of reinsurance in which the ceding company is obligated to cede, and the reinsurer is obligated to assume risk that meet specific criteria based on the provisions of the reinsurance treaty and the ceding comapany’s underwriting guidelines.
Define catastrophe coverage
a form of reinsurance that provides coverage for losses resulting from an accident or natural disaster involving more than one insured, These losses typically must exceed a specific amount and number of insreds and/or locations
Define cede risk
The risk transferred to a reinsurer by a direct writing company or to a retrocessionaire by a reinsurer
define ceding company
The company that trasnfers its risk to a reinsurer.
Define cession-
the document that describes the risk transferred
Define Counsurance
a method of reinsrance under which the assuming company receives a proportionate share of all the risks and cash flows of the policy, The reinsurer receives its share of the premiums and benefits, and set up its share of the reserves.
define excess of retention
a type of reinsurance in which a ceding company establish a dollar amount retention limit and a reinsurer agrees to assume amounts over this limit, up to the reinsurance automatic binding limit
Define Facultative-obligatory reinsurance
a form of life reinsurance that is a hybrid between faculative and automatic. The risk to be ceded is submitted to the reinsurer, which has limited rights to decline individual risks.
define faculative reinsurance
reinsurance in which the risk is offered by a direct writer to a reinsurer for u/w approval. The resinsurer has the option to accept, rate, or decline the offering.
define facultative shopping
the act of submitting an underwriting case to several reisnrers in order to obtain the most competitive offer
define financial reinsurance
specialised reinsurance transacted primarily to acheive financial goals, such as capital management, tax planning, or the financing of policy reserves.
Define first-dollar reinsurance
a form of reinsurance wherein the direct company will retain a fxed percentage of every dollar of insurance coverage issued and cede the balance to the reinsurer. Once retention limit is reached, the treaty can stipulate that all additional coverage can be automatically ceded to the reinsurere wihtin the constraints of the autobind and jumbo limits
Define jumbo limit
a limit placed on the amoont of coverage that can be in force and applied for on an individual life for automatic reinsurance purposes. if such insurance exceeds the limit, the risk must be submit for facultative review.
Define quota share reinsurance
a form of reinsurance in which premiums and losses and shared proportionately between the ceding company and the reinsurer. Under quota share, the same percentage applied to all reinsred policies in a given class of business.
define reinsurance
the transfer of part of the hazards or risk that a direct insurer assumes by way of insurance contract or legal provision on behalf of an insured to a second insurance carrier, the reinsurer, who has no direct contractual relationship with the insured.
Define reinsurance pool
a method of allocating reinsurance amoung several reinsurers. Using this method, each reinsurere receives a specifid percentage of each risk cede to the pool.
Define reserves
liabilities for amounts an insurance company is obligated to pay in accordance with an insurance policy or annuity contract
Define retention limit
a specific max amount of insurance that a life insurer is willing to carry at its own risk on any one life wihtout transferring some of the risk to another insurance company.
define retrocession
the rick ceded by a reinsurer
define retrocessionaire
a reinsurere that contractually accepts from another reinsurer a portion of the ceding company’s underlying reinsurance risk
Define treaty
the written contract defining the reinsurance aggrement. the treaty contains provisions defining the terms of the agreement including specific risk definition, data on limits and retention, and provisions for premium payment and duration.
define yearly renewable term (YRT)
A form of life reinsurance under which the risks, but not the permanent plan reserves are transfered to the reinsurer for a premium that varies each year wiht the amount at risk and the ages of the insured.
