PC1 - A11 - A12 Flashcards
Retrocession
A reinsurer for a reinsurer
Functions of Reinsurance
increase large line capacity (have to watch you don’t retain more than 10% of surplus)
provide cat protection
stabilize losses (losses can effect stock)
provide surplus relief (ceding commission offsets costs of acquisition)
facilitate withdrawal from market segment
Portfolio reinsurance
hand off all risk but still handle claims
Novation
completely transfer policy to another company
Producer types of reinsurers
Professional reinsurer (direct or use intermediary)
reinsurance intermediary - represents insurer and helps develop program (gets a commission, often through multiple companies)
direct writer - often reinsure through just one company
syndicate
each member shares a percent of the risk. How Lloyd’s started. You apply and they may take all or part of the risk
association
member companies
they issue their own policies but reinsurance certificate is attached.
Members split percent of insurance, allows for hazardous riskt
treaty reinsurance
one agreement for a whole class or portfolio
also called obligatory reinsurance - they agree in advance to cover losses. Foundation of reinsurance - no choice in what they take
facultative reinsurance
separate agreement for each loss exposure
each side gets a choice - if accepted it gets certificate
helps with large lines, reduces exposure
insures atypical/hazardous things
helps keep treaty reinsurance healthy
pro rata reinsurance
aka proportional reinsurance
amount of ins/premium/loss divided between both in same proportion as loss exposure
if 60% of liability if ceded, 60% of premium goes too
2 types: quota share (fixed percentage, 55% quota), most common in property ins, has max limit say $1mil a policy
surplus share - when policy exceeds a limit, reinsurer takes the surplus. Typically only property, limit is a multiple of the line (9 lines - 9 times the retention amount)
excess of loss reinsurance
pays for losses that exceed and amount
non-proportional reinsurance
agree on limit (aka attachment point), reinsurer takes things over that
no commissions but possible reward for good loss experience
premium is calculated by likelihood to exceed attachment point
5 types of excess loss reinsurance
per risk excess - individual risks on property
cat excess - high attachment point, usually co-participation too
per policy excess (liability)
per occurrence excess - liability, single event, no limit to # of policies
aggregate excess - cover aggregated loss over a period of time, attachment in dollars or loss ratio figure (stop-loss)
alternative to reinsurance - finite risk reinsurance
reinsurer’s liability is limited and investment income is an underwriting component
very large losses
typically multiyear
premium can be up to 70% of limit
profit sharing if good experience, no premium penalty if bad
capital market alternatives
traded securities and special purpose vehicles
cat bonds - earns high interest but may get nothing if cat happens
cat risk exchange - swamp risks between two groups
surplus notes - increase assets w/o liability
insurance accounting should be
complete, correct, exists, belongs to company, and is properly described
accounting criteria
understandable
relevant (timely)
reliable (faithful representation, verifiable)
consistent - allow for comparison
lack of bias
cost-benefit effective
Accounting frameworks (4)
GAAP - for investors, creditors, owners. ‘general purpose’, assumes operations will continue, wants value of company. SEC is at the top, with FASB underneath as the standards board
Regulatory/supervisory - interested in runoff values and liquidation, uses SAP which is realizable value
Tax Accounting - statuatory
Management Accounting - usually modified GAAP
fair value vs historical cost
fair value - price today to sell in robust market. Mark to model (estimate value if market doesn’t exist)
historical cost - price originally obtained
deferral-matching vs asset liability
deferral - premium not recognized when received, but earned over time. losses are over time too. Income focused approach. PC uses this
assets - balance forward approach, if you’re sure of future cash, go ahead and report it. No concept of earned premium
impairment
possible difference in values between income and balance sheet
principle accounting vs rule based
principle - flexible, less work. harder to audit
rules - consistent
Balance Sheet
list everything you own and everything you owe
assets - liability = net worth
net worth sometimes called ‘surplus as regards policyholders’
what are assets?
buildings, inventory, stock, bonds, cash
premium balance
reinsurance recoverables
deferred acquisition costs
what are liabilities?
claim liabilities (reserves)
unpaid claims, unpaid adjusting expenses
unearned premium
insurance expenses
Income Statement
typically for a year or quarter
calculates profitability
revenue first, then expenses, bottom line is net income
net income from operations: premium - claims - und expenses
Notes and Disclosures
list accounting framework, uncertainty
forward looking information
subsequent events - happen after report but before filing
disclose discounting of losses
Written premium types
deposit premium if it’s bound but not finalized
reinstatement premium (to reset policy with reinsurer)
retrospective adjustments
possible - policyholder dividends (negative premium or positive loss)
service charges
service fee is a flat charge - $5
finance charge is percent - 5%
unearned premium
be a liability since you have to refund if they cancel
pro rata calc assumes risk is evenly spread out - multiyear policies less likely to be equal risk the whole term (inflation)
unearned premium reserve - determine if this is enough to cover losses/expenses. if inadequate make a premium deficiency reserve (expected losses - unearned reserve)un
unearned premium reserve vs loss reserve
unearned - for losses in the future of the policy
loss reserve - after a triggering event caused a loss. Biggest liability. Reserves can be negative or positive
they aren’t really linked
Loss Adjusting Expsense
largest expense on policies
can be allocated (tied to specific policy) or unallocated (general for salaries, utilities)
incurred losses
paid losses + (end reserve - start reserve)
