Pro Rata 2

Question 1

Per Occurrence QS Notes

Answer 1

Caused by Hurricane Andrew, they reconstitute after each loss without reinstatement

Question 2

QS Swiss Army Knife (6)

Answer 2

(1) PHS relief and manage leverage
(2) Private label policy limit capacity
(3) Build CAT capacity (gross) or complement CAT program (net)
(4) Wall off unwanted pieces of business
(5) Provide implied parental support (to secure Best rating)
(6) Move profit to more favorable tax enviroment

Question 3

Surplus Share (5)

Answer 3

(1) Ceded on a per risk basis
(2) Cession % depends on each risk and is formula driven
(3) Retained liability can be variable or fixed
(4) Cede liability per risk vs losses
(5) Definition of risk is crucial as it defines how the contract cedes

Question 4

Surplus Share Line

Answer 4

Amount of liability ceded as part of the surplus share

Question 5

SS Capacity

Answer 5

Total of ceded lines plus retention amount

Question 6

Fixed Retention Formula

Answer 6

(Policy Limit - Retention) / Policy Limit

Question 7

9 Line SS Over 100k Retention

Answer 7

Fixed SS example with 1M in capacity and any risk over 100k cedes surplus liability to RI

Question 8

Variable Retention Formula

Answer 8

Policy Limit / Capacity = Suggested Retention (subject to the min); after suggested retention, need to apply the max as needed to get ceded liability

Question 9

Variable Retention Parameters

Answer 9

(1) Minimum retention liability
(2) Maximium cession liability
(3) Capacity of surplus share

Question 10

SS Reinsurance Function Grades

Answer 10

(1) Increasing Premium Capacity / Leverage – EFFECTIVE
(2) Increasing Primary Policy Limit – VERY EFFECTIVE (designed for this)
(3) Stabilization of Net Results – SOMEWHAT EFFECTIVE
(4) Increase PHS – SOMEWHAT EFFECTIVE
(5) CAT Protection – SOMEWHAT EFFECTIVE

Question 11

Similiarities (3) and Differences (3) between QS and SS

Answer 11

Similarities
(1) Both cessions of liability
(2) Both 1st dollar recoveries
(3) Premiums and liabilities shared on pro rata

Differences
(1) Calculation of cession % is different (fixed for QS, formula for SS)
(2) SS more flexible in building primary line limit
(3) SS used more with property business, QS used with both P & C

Question 12

Ceding Commission Types

Answer 12

(1) Flat – predetermined % based on ceded premium
(2) Sliding – requires provisional loss ratio and CC that slides with loss ratio
(3) Contingent – hybrid; starts with flat with potential for contingent commission if loss ratio is low

Sliding is more administration to apply & contingent as well plus contingent may not be known for a while due to delayed losses

Question 13

Contingent Formula / Steps

Answer 13

(1) Ceded premium
(2) less Ceded losses
(3) less Flat Commission (Based on #1)
(4) less RHOE (factor applied to #1)
(5) less deficit carryforward
(6) equals RI Net P/L
(7) if P, then apply contigent commission to profit

Question 14

Sliding Formula / Steps

Answer 14

(1) Calculate ceded loss ratio (ceded losses to ceded EP)
(2) compare loss ratio to provisional to adjust ceding commission based on slide
(3) double check min and max ceding commissions

Question 15

Types of QS Inception Points

Answer 15

(1) In Force Only – covers on those policies in force at the time of inception; UEP starts high and earns off (only used to wall off business)
(2) New & Renewal – UEP and EP starts at 0, UEP rises and peaks at 12 months, and EP earns off over the full 24 month period (2nd most common with UW year)
(3) In Force, New, Renewal – generally the same level of exposure over the 12 month contract (most common with accident year)

Question 16

QS Termination

Answer 16

(1) Cut-Off – RI has no obligation for losses after 12 months while policies earn off (common)
(2) Run-Off – RI has obligation for losses after 12 mo while IN FORCE policies earn off (no N&R) – less common but beneficial for full protection (don’t have to rewrite terms, allows for more ceded premium, larger ceding commissions, etc.)

Question 17

QS Accounting Periods

Answer 17

(1) Calendar Year (rarely used in RI) = when was the loss reported
(2) Accident Year = when did the loss occur
(3) Underwriting Year = when did the policy first go into effect

Definition of accounting period causes issues for termination policies (i.e. is the runoff included in the accounting period?)

Question 18

Loss Corridors

Answer 18

Less common than per occurrence caps but used for:
(1) protecting RI margin
(2) when loss ratio is stable
(3) buyers accept loss corridors for higher ceding commissions
(4) large corridors may cause risk transfer issues (not enough ceding)
(5) expressed as # of loss ratio percent

Amount of loss that corresponds to the loss ratio corridor is retained as net for the cedent