GENERAL REINSURANCE

Question 1

SECT E: REINSURANCE

BENEFITS/FUNCTIONS OF REINSURANCE (7)

Answer 1

1. SURPLUS RELIEF/CAPITAL EFFICIENCIES FROM CEDING COMMISSIONS
   REGULATORY CONCERN: MIN CAPITAL REQS TO PROTECT PH
   RATING AGENCY/INVESTOR CONCERN: CAPITAL ADEQUACY
2. SPREAD RISK OF CATS & STABILIZE UW RESULTS BY REDUCING VOLATILITY
   ENTER MKT/UW GUIDANCE
3. NEW LOB CEDANT DOESN’T FULLY UNDERSTAND -> SHARE PRICING UW GUIDANCE VIA QS
4. EXIT MKT – UNPREDICATABLE LOSSES, LOW PROFIT MARGINS OR EXCESSIVE CAPITAL REQS
5. EXPAND CAPACITY TO UNDERLYING INSURED RISK
   CEDANT CAN STILL WRITE UNDERLYING RISK, BUT SHARE LARGE RISK/LARGE LINE CAPACITY WITH REINSURER (WHO ASSUMES RISKIER LAYERS)
   CEDED LR > GROSS LR => NET LR > GROSS LR
6. FRONTING ARRANGEMENTS GIVE CEDANT ACCESS TO MKT THEY’RE NOT LICENSED IN
7. INTERNAL REINS TRANSACTIONS TO NORMALIZE/STABILIZE RESULTS WITHIN BUSINESS UNIT BY POOLING/SHARING
   CEDANT CAN RETAIN PROFITABLE BUSINESS

Question 2

SECT E: REINSURANCE

COMMON REINSURANCE CONTRACT PROVISIONS (3)

Answer 2

1. REPORTING RESPONSIBILITY OF REPORTING ENTITY
2. PAYMENT TERMS – TIME SCHEDULES, CURRENCIES, RIGHTS OF PARTIES TO WITHHOLD FUNDS
3. TERMINATION BASIS
   A. CUT-OFF – REINSURER NO LONGER LIABLE FOR OCCURRENCES AFTER TERMINATION
   B. RUN-OFF – REINSURER REMAINS LIABLE FOR LOSS UNDER POLICIES IN-FORCE AT TERMINATION

Question 3

SECT E: REINSURANCE

REQUIRED TERMS OF REINSURANCE AGREEMENTS (5)

Answer 3

1. INSOLVENCY CLAUSE – PROVIDES FOR SURVIVAL OF REINSURER’S OBLIGATIONS IN THE EVENT OF CEDANT INSOLVENCY, W/O DIMINUITION BECAUSE OF INSOLVENCY
2. TRANSFER OF RISK
   CRITERIA A: REINSURER ASSUMES SIGNIFICANT RISK IN
   I. TIMING OF RISK, INCLUDING TIMELY REIMBURSEMENT
   II. AMOUNT OF LOSS
   CRITERIA B: REASONABLY POSSIBLE FOR REINSURER TO REALIZE SIGNIFICANT LOSS
   CRITERIA B EXCEPTION: REINSURER ASSUMES SUBSTANTIALLY ALL OF RISK
   EXEMPTION TO CRITERIA B EXCEPTION: RISK (INDIV RISK OR BOOK) IS INHERENTLY PROFITABLE
3. RECOVERIES DUE TO CEDING ENTITY MUST BE AVAILABLE W/O DELAY FOR PMT OF CLAIM OBLIGATIONS
4. NO GUARANTEE OF PROFIT FROM REINSURER TO CEDING ENTITY OR VV
5. FUNDING CLAUSE FOR CERTIFIED REINSURERS (DOES NOT PRECLUDE NEGOTIATION FOR HIGHER CONTRACTUAL COLLATERAL AMOUNTS)

Question 4

SECT E: REINSURANCE

REQUIRED TERMS OF RETROACTIVE REINSURANCE AGREEMENTS (4)

Answer 4

1. CONSIDERATION TO BE PAID BY CEDING ENTITY MUST BE A SUM CERTAIN STATED
2. IN/DIRECT COMPENSATION TO CEDING ENTITY OR REINSURER IS PROHIBITED
3. ADD’L PROVISIONS BASED ON LOSS EXPER IS PROHIBITED, UNLESS THERE IS A PROVISION UNDER THE AGREEMENT FOR CEDING ENTITY’S PARTICIPATION IN REINSURER’S PROFIT
4. AGREEMENT CANNOT BE CANCELLED OR RESCINDED W/O APPROVAL OF CEDANT’S DOMICILLIARY STATE COMMISSIONER