Pro Rata Quiz Flashcards
Fac vs Treaty
“Fac (15% of premiums) used on individual risks, way to provide higher limits, one-off contracts, involve the reinsurer immediately before the primary contract is sold so can pass on the cost to the insured
Treaty (85%) cornerstone of reinsurance, blanket rate, cannot pass on costs to insureds”
Five Functions of Reinsurance
- Increasing premium capacity (cede premium to RI which frees up capacity and capital to write more business)
- Increase primary policy limit / risk capacity (allow for higher limits on primary policies)
- Stabilization of net results (stabilize loss ratio)
- Increase PHS / Financing (cede UEPR and receive ceding commision performs accounting maneuver to up surplus)
- CAT protection (top end protection against catastrophic losses)
Quota Share Characteristics
“Pre-determined, fixed percentage
Primary policy limit determines what primary policies can be ceded ($1M max limit, a 1.2M last 200k is not ceded)
1st dollar recovery, loss ratio does not change”
Calculation reminders
“Per occurrence cap – need to apply total loss to per occurrence cap first, then calculate the ceded loss amount
Limit cap – need to double check only the policies with limits below the QS policy limit are applied to the contract”
Underwriting Expenses
Includes agent commissions, general expenses like state fees, premium taxes, etc. — usually ends up being 25%-35% of premium
PHS Relief
“Ceded UEPR * Ceding Commission % at point of inception
Will vary based on amount of incoming UEP, Ceding Commission %, Cession %; PHS relief will be reversed when contract is cancelled so you need to consider how to come off the QS (ideally gradually as you improve PHS organically)
Useful to write business in hard markets (high prices -> high UEPR)”
Leverage Ratio
“Net Written Premium / Surplus
Ideally this ratio is 2:1 or lower (no more than 3:1)”
QS Response Limits
“Per Occurrence
Per Occurrence, Per Policy – most common to ensure adequate protection
Per Insured”
QS Reinsurance Function Effectiveness
“1. Increasing Primary Policy Volume or Leverage — VERY EFFECTIVE (has potential to cede significant premium and free up capacity to write more business)
2. Increase Primary Policy Limit — SOMEWHAT EFFECTIVE (QS can be written to provide limit for liability policies like umbrella policies, esp gross QS)
3. Stabilization of Net Results — SOMEWHAT EFFECTIVE (not effective to stabilize for a particular LOB but can be effective net of all LOBs (ex 100% on umbrella that have bad results))
4. Increase in PHS — VERY EFFECTIVE (can be very effective but depends on ceding commission size, cession %, and SEP; by decreasing expenses (recouped through ceding commission) the financial impact to the insurer is that their policyholders’ surplus (PHS) is temporarily increased)
5. CAT Protection — SOMEWHAT EFFECTIVE (QS can be very effective on CAT protection bc it is first dollar loss but also is very costly to build cat capacity this way – both gross and net can be used in different ways)”
Surplus Relief QS vs Policy Limit Capacity QS
“Surplus Relief – need large amount of ceded premium, high cession %, ceding commission is crucial, limited to no property cat exposure
Policy Limit QS – often LOB specific, modest ceded premium, modest ceding commission, % cession is very important, carves out policies from the larger portfolio”
Per Occurrence QS Notes
Caused by Hurricane Andrew, they reconstitute after each loss without reinstatement
QS Swiss Army Knife (6)
“(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”
Surplus Share (5)
“(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”
Surplus Share Line
Amount of liability ceded as part of the surplus share
SS Capacity
Total of ceded lines plus retention amount
