Lecture 7

Question 1

what is reinsurance?

Answer 1

insurance for insurance companies

Question 2

what are the 3 types of risk that primary insurance companies inherit?

Answer 2

1. mortality risk
2. investment risk
3. persistency risk
4. expense risk

Question 3

what is the Net Amount at Risk?

Answer 3

NAR = DB - Reserve held at time of death

Question 4

what is the retention limit?

Answer 4

maximum amount that a company is willing to lose when one insured dies.

Question 5

what is a reinsurance treaty? what are the two primary approaches?

Answer 5

contract between the company and the reinsurer that documents how the reinsurance will work

1. automatic reinsurance - reinsures an entire product/class of business
2. facultative reinsurance - reinsures specific policies

Question 6

what are the two bases that automatic reinsurance is dealt with?

Answer 6

1. excess: the portion of NAR > company’s retention limit

2. first dollar: reinsuring a % of every risk

Question 7

what is recapture?

Answer 7

give the company the right to pull back or recapture some of the risk it originally reinsured

Question 8

what is an expense allowance?

Answer 8

often paid by the reinsurer to reimburse the company for expenses on the business reinsured

Question 9

Why do insurers seek reinsurance? 4

Answer 9

• seek advice rather than reinsurance, they are industry experts
• reinsure risks too large for insurers (e.g cyber)
• reinsurance may offer price that make it more attractive to reinsure rather than retain business
• company may be writing new business at a faster pace than its capital will allow

Question 10

what is YRT? what are its two elements

Answer 10

It is the most common type of reinsurance, yearly renewable term
two elements:
1. the company pays the reinsurer a reinsurance premium once a year, on policy anniversaries
2. the reinsurer pays the company a reinsured DB if and when the insured dies

Question 11

how to calculate NAR?

Answer 11

1. DB - solvency reserve
2. DB - cash values
3. DB - 0

Question 12

What is the YRT DB on a first dollar basis?

Answer 12

the % reinsured * NAR

note:

• same reinsurance % applies to every policy, regardless of size
• % reinsured stays constant over time

Question 13

What methods are used to find the YRT DB on an excess basis? 3

Answer 13

• brute force method
• straightforward method
• finesse method

learn each of these?

Question 14

what are the most common methods of expressing YRT premium rates?

Answer 14

• as a % of standard industry mortality tables or the company’s mortality tables
• for term: % of premium rates
• for UL: % of COI rates

Question 15

what are the 3 cashflows associated with YRT reinsurance?

Answer 15

1. premiums
2. DB
3. expense allowances

Question 16

YRT Reserve credits?