PC1 - A11 - A12

Question 1

Retrocession

Answer 1

A reinsurer for a reinsurer

Question 2

Functions of Reinsurance

Answer 2

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

Question 3

Portfolio reinsurance

Answer 3

hand off all risk but still handle claims

Question 4

Novation

Answer 4

completely transfer policy to another company

Question 5

Producer types of reinsurers

Answer 5

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

Question 6

syndicate

Answer 6

each member shares a percent of the risk. How Lloyd’s started. You apply and they may take all or part of the risk

Question 7

association

Answer 7

member companies
they issue their own policies but reinsurance certificate is attached.
Members split percent of insurance, allows for hazardous riskt

Question 8

treaty reinsurance

Answer 8

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

Question 9

facultative reinsurance

Answer 9

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

Question 10

pro rata reinsurance

Answer 10

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)

Question 11

excess of loss reinsurance

Answer 11

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

Question 12

5 types of excess loss reinsurance

Answer 12

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)

Question 13

alternative to reinsurance - finite risk reinsurance

Answer 13

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

Question 14

capital market alternatives

Answer 14

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

Question 15

insurance accounting should be

Answer 15

complete, correct, exists, belongs to company, and is properly described

Question 16

accounting criteria

Answer 16

understandable
relevant (timely)
reliable (faithful representation, verifiable)
consistent - allow for comparison
lack of bias
cost-benefit effective

Question 17

Accounting frameworks (4)

Answer 17

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

Question 18

fair value vs historical cost

Answer 18

fair value - price today to sell in robust market. Mark to model (estimate value if market doesn’t exist)
historical cost - price originally obtained

Question 19

deferral-matching vs asset liability

Answer 19

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

Question 20

impairment

Answer 20

possible difference in values between income and balance sheet

Question 21

principle accounting vs rule based

Answer 21

principle - flexible, less work. harder to audit
rules - consistent

Question 22

Balance Sheet

Answer 22

list everything you own and everything you owe
assets - liability = net worth
net worth sometimes called ‘surplus as regards policyholders’

Question 23

what are assets?

Answer 23

buildings, inventory, stock, bonds, cash
premium balance
reinsurance recoverables
deferred acquisition costs

Question 24

what are liabilities?

Answer 24

claim liabilities (reserves)
unpaid claims, unpaid adjusting expenses
unearned premium
insurance expenses

Question 25

Income Statement

Answer 25

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

Question 26

Notes and Disclosures

Answer 26

list accounting framework, uncertainty
forward looking information
subsequent events - happen after report but before filing
disclose discounting of losses

Question 27

Written premium types

Answer 27

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)

Question 28

service charges

Answer 28

service fee is a flat charge - $5
finance charge is percent - 5%

Question 29

unearned premium

Answer 29

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

Question 30

unearned premium reserve vs loss reserve

Answer 30

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

Question 31

Loss Adjusting Expsense

Answer 31

largest expense on policies
can be allocated (tied to specific policy) or unallocated (general for salaries, utilities)

Question 32

incurred losses

Answer 32

paid losses + (end reserve - start reserve)