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C121 > Chapter 9 > Flashcards

Chapter 9 Flashcards

1
Q

Reinsurance - Intro

A
  • Critical to the insurance industry.
  • Started in 1800s.
  • Similar to a primary insurer.
  • Does not change inherent nature of the risk.
  • Reinsurance can be different in practice - most evident in treaty reinsurance.
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2
Q

Reinsurance

A

The transfer to a reinsurer of all or part of an insurance risk from an insurer, or alternative vehicle for risk financing.

The insurance of the insurer.

Separate contract from primary policy.

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3
Q

Reinsurer

A

Is an insurance company that accepts risk from and on behalf of another insurance company or alternative vehicle for risk financing.

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4
Q

Speculative Risk

A

Chance of either loss or gain (ex. gambling)

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5
Q

Pure Risk

A

No chance of gain, only loss (insurance).

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6
Q

Cedent or Ceding Company

A

The insurer or alternative vehicle for risk financing that transfers the risk to the reinsurer.

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7
Q

Ceding Commission

A

The percentage of the reinsurer’s share of the original insurance premium that is paid to the cedent by the reinsurer.

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8
Q

Cession

A

The transfer of risk to a reinsurer, the amount of risk so ceded.

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9
Q

Retention

A

The amount of risk that the insurer retains rather than cede to a reinsurer under a particular reinsurance arrangement.

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10
Q

Retrocession

A

The transfer of all or part of a reinsurance risk from a reinsurer to one or more other reinsurers.

Reinsurance for reinsurers.

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11
Q

Retrocessionaire

A

A reinsurer that assume risk on and behalf of another reinsurer.

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12
Q

Types of Reinsurance

A
  • Facultative

- Treaty

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13
Q

Facultative Reinsurance

A
  • Reinsurance placed on an individual risk or policy.
  • Faculty refers to the right or ability of each party to the reinsurance transaction to accept or reject a specific risk.
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14
Q

Treaty Reinsurance

A
  • Agreement between the insurer and the reinsurer to reinsure a block or portfolio of business without the insurer’s having to submit each risk to the reinsurer.
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15
Q

Methods of Reinsurance

A
  • Proportional

- Non-Proportional

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16
Q

Proportional Reinsurance

A
  • A percentage of the risk is transferred to the reinsurer.
  • Reinsurer receives that same percentage of the original premium and is responsible for that same percentage of each loss.
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17
Q

Non-Proportional Reinsurance

A
  • Insurer pays all of the loss up to an agreed amount (i..e their retention), the insurer then pays the part of the loss that exceeds the retention limit.
  • Premium charged by the reinsurer will be part of the original insurance premium, but will not bear any proportional relationship to the amount of loss the reinsurer may pay.
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18
Q

Benefits of Treaty Reinsurance

A
  • Better spread of risk to reinsurer. Pricing more favourable.
  • More economical and easier to administer
  • Can save time.
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19
Q

Underwriting Treaty Insurance

A
  • Underwriting the underwriter
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20
Q

Quota Share Treaty

A
  • Simplest for of proportional treaty reinsurance.
  • Both property and casualty.
  • Reinsurer assumes same percentage of each risk in portfolio.
  • Insurer must cede every risk.
  • Reinsurer is obligated to accept every risk.
21
Q

Benefits of Quota Share Treaty

A
  • Can protect against frequency and severity of losses.
  • Protects the insurers net retention
  • Helps with financial considerations
  • Increases capacity
22
Q

Disadvantages to Quota Share Treaty

A
  • Insurer does not retain as much of the premium.

- May not have much control of claims handling

23
Q

Surplus Treaty

A
  • Proportional treaty
  • Reinsurer share of risk is what remains after the insurer’s retention has been set.
  • Percentage of each risk is not fixed, uw and reinsurer decide how much will be ceded one risk at a time.
  • Insurers retention is called a line.
  • Insurer must accept a reasonable share.
24
Q

Non-Proportional Facultative Reinsurance

A

Arranged on an excess of loss basis.

25
Q

Non-Proportional Treaty Reinsurance

A
  • Arranged on an excess of loss basis.
  • Represents layers sitting on top of one another.
  • Insurer retails bottom or primary layer, which is expected to have the majority of loss activity.
  • Usually used when severity of loss is the consideration.
26
Q

Per Risk Excess of Loss Treaty

A
  • Mainly used for property risks.
  • Treaty applies to each physical risk separately.
  • Can be used separately or in conjunction with other treaties.
27
Q

Catastrophe Excess of Loss Treaty

A
  • All losses from the same event taken into consideration if it exceeds insurer’s retention.
  • Typical catastrophe excess of loss treaty applies to the ultimate net loss of the insurance company resulting from all losses due to the same event.
28
Q

Ultimate Net Loss

A

The amount of loss that the insurer is called on to pay after recovering amounts due from all other reinsurance.

29
Q

Advantages of Non-Proportional Reinsurance

A
  • Can protect from severe losses by capping the amount paid by the insurer.
  • Allows insurer to keep a larger portion of the premium.
  • Allows for the possibility of more control for how claims are handled.
30
Q

Disadvantages of Non-Proportional Reinsurance

A
  • Danger the insurer will find that it set its retention incorrectly. Can effect financial results.
31
Q

Functions of Reinsurance

A

Need for reinsurance can fall into four general categories:

  • Capacity
  • Catastrophe protection
  • Stabilization of results
  • Maket entrance or exit
32
Q

Capacity

A
  • Allows for higher limits of insurance than the insurer can provide alone.
33
Q

Catastrophe Protection

A
  • Aggregate loss may be too great for its resources.
34
Q

Stabilization of Results

A

Can help smooth out the fluctuations in the insurer’s operating results from one year to the next.

35
Q

Market Entrance or Exit

A
  • New ventures need time.
  • Reinsurers can offer expertise.
  • Can run off the book of business it no longer wants to be a part of and transfer the risk to a reinsurer.
36
Q

Reinsurance Pricing

A
  • Proportional: Premium for risk determined by insurer, reinsurer receives a portion.
  • Non- Proportional: Based on a funding approach and formula guidelines.
  • Reinsurance pricing determined heavily by actuarial analysis. Can look at the following:
  • Loss history
  • Current rates and premiums, and historical prospective changes
  • Historical and prospective policy counts and policy limit profiles.
  • Loadings are added to pure premium.
37
Q

Long Layers

A

Reinsurers tend not to authorize long layers, that is, excess laters that are disproportionately large compare to the primary later or underlying layers of reinsurance.

38
Q

Types of Reinsurers

A
  • Direct writers
  • Broker market reinsurers
  • Reinsurance departments
39
Q

Direct Writers

A

Deal directly with the insurer, no intermediaries involved.

40
Q

Broker Market Reinsurers

A

Assume business through reinsurance brokers.

41
Q

Reinsurance Departments

A

Primary insurers may assume reinsurance for other insurers or reinsurers. Not their core business.

42
Q

Licensed Reinsurer

A

Registered with federal or provincial government.

Federal - can write business nationally.

Provincial - only in the same province.

Reinsurance regulation is focused on solvency.

43
Q

Unlicensed Reinsurers

A

Not governed by regulatory board, not scrutinized by authorities for insolvency.

Limitations to what they can reinsure.

44
Q

Selecting Reinsurer

A
  • No one single way.
  • Look at financial strength
  • Claims payment terms
  • Cash calls?
  • Other services: help with UW? new products?
  • How long in business
  • Do they control claims and underwriting, or let insurer handle them
  • Are their terms and conditions favourable?
45
Q

Selecting an Insurer

A
  • Look at all aspects of underwriting operations
  • Guidelines used
  • Management reports and how they’re used
  • Accounting department
  • Claims department
  • Insurer’s financial statements
  • Cash flow
  • Collections department?
46
Q

Reinsurance Contracts

A
  • Facultative certificates

- Treaty contracts

47
Q

Facultative Certificates

A

Declaration page that includes:

  • Name of insurer
  • Policy number
  • Name of insured
  • Policy period of insurer
  • Policy period of reinsurer
  • Covergages reinsured
  • Original policy limits
  • Insurer’s policy limits
  • Insurer’s retention
  • Reinsurance limits
  • Minimum retained premium
  • Premium
  • Adjustment Basis
  • Instalment agreements

General Conditions:

  • Claims expense
  • Claims cooperation
  • Insolvency issues
  • Cancellation provisions
  • Dispute resolution process
48
Q

Treaty Contracts

A
  • Preamble identifying parties to contract
  • Class of business covered
  • Exclusions
  • Basis of coverage
  • Ultimate net loss
  • Limits of reinsurance
  • Claims reporting procedures and provisions
  • Commencement and termination of coverage
  • Insolvency issues
  • Dispute resolution process

C121 (9 decks)

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