Module 6 Flashcards
Reinsurance
transfer of risk from one insurer to another
other insurer agrees to indemnify for some or all of financial consequences of certain loss exposures
Primary Insurer
the insurer transferring the risk to the reinsurer
Reinsurer
The insurer that assumes some or all of the potential consequences of loss exposures of the primary insurer
Reinsurance Agreement
.Contract between primary insurer and reinsurer that sets out details of reinsurance and type of accounts to be transferred
Insurance Risk
uncertainty about the adequacy of insurance premiums to pay losses
Retentions
the amount retained by the primary insurer to reinsurance transaction
Reinsurance premium
.consideration paid by primary insurer for the reinsurer assuming some or all of the primary insurer’s risk
ceding commission
The part paid by the reinsurer to the primary insurere to cover part or all of the primary insurer’s policy acquisition expenses
Retrocession
.reinsurance agreement where reinsurere transfere all or part of the reinsurance risk it has asssumed or will assume to another reinsurer
Retrocedent
.the reinsurere that transfers or cedes all or part to another reinsurere
Retrocessionaire
the reinsurere that assumes all or part of reinsurance
Large-line capacity
an insurer’s ability to provide larger amounts of insurance for property loss exposures or higher limits of liability for liability loss exposures than it is otherwise willing to provide
Line
the maximum amount of insurance or limit of liability that an insurer will accept on a single loss exposure
Surplus relief
a replenisment of policy holder’s surpluse provided by ceding commission paid to the priamry insurer by the reinsurer
Policyholder’s surplus
an insurer’s total assets minus its total liabilities
Portfolio reinsurance
reinsurance that transfers to the reinsurere liability for an entire type of insurance, territory or book of business af ther trimary insurer has issued the policies
novation
an agreement under which one insurer or reinsurer is substituted for another
Describe the purpose of retrocession
retrocedent transfer all or part of a reinsurance risk to another reinsurer, the retrocessionaire
Describe some of the practical business goals that reinsurance can help an insurer achieve
insuring large exposures
protecting policyholders’s surplus from adverse loss experience
financing insurer’s growth
List all six principal functions that reinsurance performs for primary insurers
increase large l ine capacity
provide catastrophe protection
stabilize loss experience
provide surpluse relief
facilitate withdrawal from a market segment
provide underwriting guidance
Describe how increasing its large-line capacity allows an insurer to grow
allows a primary insurere to assume more significant risks than its financial condition and regulations would otherwise permit
Name the three ways in which a primary insurer can use reinsurance to stabilize its loss experience
limit liability for single loss exposure
limit liability for several loss exposures affected by a common event
limit liability for loss exposures that aggregate claims over time
Explain how a primary insurer may completely eliminate the liabilities it has assumed under the policies it has issued
through novation - one insurer/reinsurer is substituted for another
not considered portfolio reinsurance because the substitute insurer assumes the direct obligations to insureds covered by the underlying insurance
Professional reinsurer
primary business is serving reinsurance needs
Direct writing reinsurer
a professional insurere whose employees deal directly with primary insurers (as opposed to reinsurance intermediaries)
Reinsurance intermediary
works with primary insurers to develop reinsurance programs and that negotiates contractes of reinsurance between primary insurer and reinsurers.
recives commission for placement and other services
Reinsurance pools, syndicates and associations
groups of insureres that share the loss exposures of the group usually through reinsurance
Reinsurance pool
.a reinsurance association that consists of several unrealted insurers or reinsurers thave have joined to insure risks that the individual members are unwilling to individually insure
Syndicate
a group of insureres or reinsurers involved in joint underwriting to insure major risks that are beyond the capacity of a signle insurere or reinsurere. Each syndicate member accpets predetermined shares of premiums, losses, expenses and profts
Association
An organization of member companies that reinsure by fixed percentage the total amount of insurance appearing on policies issued by the organization
Identify the three sources from which reinsurance may be purchased
professional reinsureres
reinsurance departments of primary insurers
Reinsurance pools, syndicates, associations
Describe the role of a reinsurance intermediary
.represent a primary insurer
work with that insurer to design a reinsurance program that is then placed with a reinsurer or reinsurers
Name the factors a primary insurer should evaluate when considering a reinsurer
claim paying ability
reputation
management competence
Describe the function of reinsurance pools, syndicates and associations
provide member companies with the opportunity to participate in a line of insurance with a limited amount of capital without having to employ the specialists needed for such a venture
Treaty reinsurance
reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insureres individual loss exposures that fall wiht the treaty are automatically reinsured
Facultative reinsurance
reinsurance of indvidual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer and the reinsurere can accpet or reject any loss exposures submitted
Adverse selection
the decision to reinsure those loss exposures that have an increased probailiyt of loss because the retneation of those loss exposures is undesirable.
Facultative certifiacte of reinsurance
an agreement that defines the tuerms of the facultativ reinsurance coverage on a specific loss exposure
Contrast treaty reinsurance and facultative reinsurance
treaty - reinsurer takes all loss exposures that fiall within the treaty
facultative - primary insurer negotiates a spearate agreement for each loss exposure that it wan’ts to reinsure
explain why primary insurers usually make treaty reinsurance agreement so their underwriters do not have to exercise discretion in using reinsurance
treaty reinsurance agreements prevent adverse selection
Identify the four functions of facultative reinsurance
provides large line capacity for los exposures that exceed the limts of treaty reinsurance agreements
reduce primary insurers exposure in a given geographic area
insure a loss exposure with atypical hazrd characteristics and thereby maintain the favorable loss experience of the primary insurer’s treaty reinsurance and any associated profit sharing agreement
Pro rata reinsurance
proportionately share amounts of insurance, policy premiums and losses, including loss adjustment expenses
Loss adjustment expense
the expense that an insurere incurs to investigate, defend and settle claims
flat commission
a ceding commission that is a fixed percentage of the ceded premiums
profit sharing commission
a ceding commission that is contingent on the reinsurer realizing a predetermined percentage of excess profit on ceded loss exposures
sliding scale commisison
ceding commission based on a formula that adjusts the commission according to the profitability of the reinsurance agreement.
quota share reinsurance
.type of pro rata reinsurance in which the primary insurer and the reinsurer share the amounts of insurance, policy premiums and losses
loss ratio
a ration that measures losses and LAE against earned premiums and that reflects the percentage of premiums being consumed by losses
catastrophe excess of loss reinsurance
a type of excess of loss reinsurance that protects the primary insurer from an accumulation of retained losses that arise from a single catastrophic event
variable quota share treaty
a quota share reinsurance treate in which the cession percentage retention varies based on specified predetermined criteria such as the amount of insurance needed
surpluse share reinsurance
a type of pro rata insurance in which policies covered are those whose amount of insurance exceeds a stipulated dollar amount or line
bordereau
a report the primary insurer provides periodically to the reinsurer that contains a history of all loss exposures reinsured under the treaty
line guide
a document that provides the minimum and maximum line a primary insurer can retain on a loss exposure
excess of loss reinsurance (nonproportional reinsurance
a type of reinsurance in which the primary insurer is indemnified for losses that exceed a specified dollar amount
attachment point
the dollar amount above which the reinsurer responds to losses
subject premium
the premium the primary insurer charges on its underlying policies and to which a rate is applied to determine the reinsurance premium
working cover
an excess of loss reinsurance agreement with a low attachment point
per risk excess of loss reinsurance
.covers property insurance and applies speartely to each loss occurring to each risk
loss occurrence clause
a reinsurance agreement clause that defines the scope of catastrophic occurrence for the purposes of the agreement.
per policy excess of loss reinsurance
applies the attachment point and the reinsurance limit separately to each insurance policy issued by the primary insurer regardless of the number of losses occurring under each policy
per occurrence excess of loss reinsurance
a type of excess of loss resinurance that applies the attachment point and reinsurance limit to the total losses arising from a single event affecting one or more of the primary insurer’s policies
clash cover
type of per occurrence excess of loss reinsurance for liability loss exposures that protects the primary insurere against aggregations of losses from one occurrence that affects several insureds or several types of insurance
extracontractual damages
damages awarded to the insured as a result of the insurer’s improperly handling a claim
identify the two principal approaches that reinsureres use to allocate losses
treaty reinsurance
facultative reinsurance
describe the distinguising charactistic of quoat share insurance
.primary insurere and reinsurer use a fixed percentage in sharing the amounts of insurance , policy premiums and losses (including LAE)
Explain how the amount of insurance., the premium and losses are allocated under a pro rata reinsurance agreement.
divided between the primary insurere and the reinsurer in the same propotions as the risk
Describe the distinguishing characterist of surplus share reinsurance
.when an underlying policy’s total amount of insurance exceeds stipulated dollar amount, or line, the reinsurere assumes the surpluse share of the amount of insurance (the difference between the insurer’s line and the limit)
Describe the circumstances in which a reinsurer will respond to a loss under an excess of loss reinsurance agreement.
the reinsurere responds to a loss only when the loss exceeds the prmary insurer’s retention (the attachment point)
Describe the two most common approaches to handling loss adjustment expenses under an excess of loss reinsurance agreement
prorate the loss adjustement expenses between primary insurere and reinsurere based on same precentage share that each is responsible for the loss
add loss adjustment expenses to the amount of the loss when applying the attachment point of the excess of loss reinsurance agreement
describe the application of per risk excess of loss reinsurance
applies separately to EACH LOSS occuring to EACH RISK with the primary insurere usually determing what constitutes each risk
describe how a loss occurrence clause functions within a catastrophe excess of loss reinsurance agreement
.specifies a time period in hours during which the primary insurer’s losses from the same catastrophic occurrence can be aggregated and applied to the attachment poitn and reinsurance limits of the catastrphe excess of loss reinsurance agreement
72 hours for hurricane
168 hours for earthquake
Describe the purpose of catastrophe excess of loss reinsurance
protects the primary insurer from an accumulation of retained losses that arise from a single catstrophic event
Explain how per policy excess of loss reinsurance functions
primarily with liability insurance
applies the attachment point and the reinsurance limit separately to each insurance policy issued, regardless of number of losses occurring under the policy
Explain how occurence excess of loss reinsurance fucntions
applies the attachment point and the reinsurance limit to the total losses that occur from a single event
Describe the types of liability insurance for which clash cover is useful
liability insurance in which the loss adjustement expenses are likely to be very high and the underlying per occurrence reinsurance limits include these expenses rather than proprate them.
Describe the type of losses that aggregate excess of loss reinsurance covers
used for property or liability insurance and covers aggregated losses that exceed the attachment point and occur over a stated period, usually one year
cut through endorsement
an endorsement that provides that in the event of the insolvency of the primary insruer the reinsurer directly assumees the obligations of the primary insurer
identify situations in which a risk manager would deal directly with a reinsurer
a reinsurere takes the place of an insurere as a result of portfolio reinsurance arrangement
a reinsurere takes the place of an insurerre through a cut-through ensoresment
an org establishes a subsidiary that insurers or reinsures the org’s loss exposures
an org purchases reinsurance for a pool of which it is a member
a reinsurer or several reinsurers team up with an insurer or several insurers to provide coverage
explain why a risk manager whose insurance plan has been reinsured through a portfolio insurance arrangement should be aware of details of the transaction
to ascertain that coverage is maintained and that the reinsurer is at least as financially sound as the retiring insurer
identify the factors a risk manager should consider when reinsuring risk through a pool
financial strength
integrity
operating efficiency of pool’s reinsurer
