Introduction

Question 1

Economic role of (Re)insurance

Answer 1

Transfer risk
Fund and adjust losses
Identify and price risk

Question 2

Differences between direct and reinsurance

Answer 2

For reinsurance:

• More model driven
• Data is far more sparse
• Different capital need
• Have multiple counter parties
• Complex contracts
• Different type of underwriting, concerned with concentrations / extreme risk
• Cost of capital (volatility charges) are a much larger part of premium

Question 3

Need for reinsruance

Answer 3

1. Capital relief
2. Underwriting expertise
3. Claim expertise
4. Capacity to write new risks
5. Ability to offer complete solutions to customers
6. Improve financial rating
7. Protection against “known known”, “Known unknowns”, “Unknown Unknowns”

Question 4

Known knwons

Answer 4

Long tail claims -liability lines of business

Question 5

Known unknowns

Answer 5

Extreme events - catastrophes e.g. Earthquake, Cyclones, Bushfire etc.

Question 6

Unknown unknowns

Answer 6

9 / 11, Pandemics

Question 7

The reinsurance process

Answer 7

Collect data, Assess Risk, Determine risk appetite, Engage broker, Design program, Test alternatives, Decide on optimal structure, Negotiate contract terms, Seek capital provider, Confirm price, Contract signing

Question 8

Facultative reinsurance

Answer 8

An arrangement in which individual risks (single policies) are offered by the ceding insurer to a re insurer, who has the right (faculty) to accept or reject each risk

Question 9

Proportional treaties

Answer 9

Premiums and claims are shared between cedants and reinsurers in the same proportion

Question 10

Two types of proportional treaties

Answer 10

Surplus and Quota share

Question 11

Surplus share

Answer 11

All amounts greater than retention is ceded up to the limit of the Treaty and distribution of risk is determined at time of underwriting

Question 12

Quota Share Treaty example: Limit $1 m retention 50%

Answer 12

Cedant will 50% of every risk up until $1 mil. Reinsurer will take 50% of every risk

Question 13

Surplus Treaty example: 8 line surplus treaty of $1 million, treaty limit $8 mil

Answer 13

Reinsurer willing to write 8 times the amount the insurer is willing to retain, but up to a maximum of $8 million

Question 14

catastrophe

Answer 14

a loss involving two or more insured risks directly involved in the same event

Question 15

Rate on Line (ROL)

Answer 15

Premium paid for the layer divided by the limit of the layer

Question 16

Ceding commission

Answer 16

An allowance (usually a percentage of the reinsurance premium) made by the reinsurer for part or all of a ceding company’s acquisition and other costs

Question 17

Sliding scale commission

Answer 17

a commission paid to the reinsured which is determined by the loss ratio

Question 18

Probable Maximum Loss (PML)

Answer 18

An estimate of the likelihood that a catastrophic loss will be met or exceeded within a specified time

Question 19

Maximum Possible Loss

Answer 19

The worst loss that could possibly occur because of a single event

Question 20

Commutation

Answer 20

An agreement between a ceding insurer and the reinsurer that provides for the valuation, payment, and complete discharge of all obligations between the parties under a particular reinsruance contract

Question 21

Increased limit fctors

Answer 21

Multiplicative factors that are applied to rates or premiums for “basic” limits of coverage, to determine premiums for higher limits of coverage

Question 22

Indexation Clause

Answer 22

A reinsurance tool which attempts to more equally share the burden of inflation between insurer and reinsurer

Question 23

Loss Portfolio Transfer (Run-off Cover)

Answer 23

A financial reinsurance transaction in which loss obligations that are already incurred and will ultimately be paid are ceded to a reinsurer

Question 24

Event limit

Answer 24

The maximum a reinsurer will pay on a single event under a proportional or XOL treaty