Reinsurance

Question 1

Reinsurance

Answer 1

The transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium, to indemnify another insurer (the primary insurer) for some or all of the financial consequences of certain loss exposures covered by the primary’s insurance policies

Question 2

Primary insurer

Answer 2

In reinsurance, the insurer that transfers or cedes all or part of the insurance risk it has assumed to another insurer in a contractual arrangement

Question 3

Reinsurer

Answer 3

The insurer that assumes some or all of the potential costs of insured loss exposures of the primary insurer in a reinsurance contractual agreement

Question 4

Reinsurance agreement

Answer 4

Contract between the primary insurer and reinsurer that stipulates the form of reinsurance and the type of accounts to be reinsured

Question 5

Insurance risk

Answer 5

Uncertainty about the adequacy of insurance premiums to pay losses

Question 6

Retention

Answer 6

The amount retained by the primary insurer in the reinsurance transaction

Question 7

Reinsurance premium

Answer 7

The consideration paid by the primary insurer to the reinsurer for assuming some or all of the primary insurer’s insurance risk

Question 8

Ceding commission

Answer 8

An amount paid by the reinsurer to the primary insurer to cover part or all of the primary insurer’s policy acquisition expenses

Question 9

Retrocession

Answer 9

A reinsurance agreement whereby one reinsurer (the retroceding) transfers all or part of the reinsurance risk it has assumed or will assume to another reinsurer (the retrocessionaire)

Question 10

Retrocedent

Answer 10

The reinsurer that transfers or cedes all or part of the insurance risk it has assumed to another reinsurer

Question 11

Retrocessionaire

Answer 11

The reinsurer that assumes all or part of the reinsurance risk accepted by another reinsurer

Question 12

Large-line capacity

Answer 12

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

Question 13

Line

Answer 13

The maximum amount of insurance or limit of liability that an insurer will accept on a single loss exposure

Question 14

Surplus relief

Answer 14

A replenishment of policyholders’ surplus provided by the ceding commission paid the primary insurer by the reinsurer

Question 15

Portfolio reinsurance

Answer 15

Reinsurance that transfers to the reinsurer liability for an entire type of insurance, territory, or book of business after the primary insurer has issued the policies

Question 16

Novation

Answer 16

An agreement under which one insurer or reinsurer is substituted for another

Question 17

Professional reinsurer

Answer 17

An insurer whose primary business purpose is serving other insurers’ reinsurance needs

Question 18

Direct writing reinsurer

Answer 18

A professional reinsurer whose employees deal directly with primary insurers

Question 19

Reinsurance intermediary

Answer 19

An intermediary that works with primary insurers to develop reinsurance programs and that negotiates contracts of reinsurance between the primary insurer and reinsurer, receiving commission for placement and other services rendered

Question 20

Reinsurance pools, syndicates, and associations

Answer 20

Groups of insurers that share the loss exposures of the group, usually through insurance

Question 21

Reinsurance pool

Answer 21

A reinsurance association that consists of several unrelated insurers or reinsurers that have joined to insure risks the individual members are unwilling to individually insure

Question 22

Syndicate

Answer 22

A group of insurers or reinsurers involved in joint underwriting to insure major risks that are beyond the capacity of a single insurer or reinsurer; each syndicate member accepts predetermined shares of premiums, losses, expenses, and profits

Question 23

Association

Answer 23

An organization of member companies that reinsure by fixed percentage the total amount of insurance appearing on policies issued by the organization

Question 24

Adverse selection

Answer 24

The decision to reinsure those loss exposures that have an increased probability of loss because the retention of those loss exposures is undesirable

Question 25

Facultative certificate of reinsurance

Answer 25

An agreement that defines the terms of the facultative reinsurance coverage on a specific loss exposure

Question 26

Pro rata reinsurance

Answer 26

A type of reinsurance in which the primary insurer and reinsurer proportionately share the amounts of insurance, policy premiums, and loss (including loss adjustment expenses)

Question 27

Loss adjustment expense (LAE)

Answer 27

The expense that an insurer incurs to investigate, defend, and settle claims according to the terms specified in the insurance policy

Question 28

Flat commission

Answer 28

A ceding commission that is a fixed percentage of the ceded premiums

Question 29

Profit-sharing commission

Answer 29

A ceding commission that is contingent on the reinsurer realizing a predetermined percentage of excess profit on ceded loss exposures

Question 30

Sliding scale commission

Answer 30

A ceding commission based on a formula that adjusts the commission according to the profitability of the reinsurance agreement

Question 31

Quota share reinsurance

Answer 31

A type of pro rata reinsurance in which the primary insurer and the reinsurer share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) using fixed percentage

Question 32

Catastrophe excess of loss reinsurance

Answer 32

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

Question 33

Surplus share reinsurance

Answer 33

A type of pro rata reinsurance in which the policies covered are those whose amount of insurance exceeds a stipulated dollar amount, or line

Question 34

Bordereau

Answer 34

A report the primary insurer provides periodically the reinsurer that contains a history of all loss exposures reinsured under the treaty

Question 35

Line guide

Answer 35

A document that provides the minimum and maximum line a primary insurer can retain on a loss exposure

Question 36

Excess of loss reinsurance (non proportional reinsurance)

Answer 36

A type of reinsurance in which the primary insurer is indemnified for losses that exceed a specified dollar amount

Question 37

Attachment point

Answer 37

The dollar amount above which the reinsurer responds to losses

Question 38

Subject premium

Answer 38

The premium the primary insurer charges on its underlying policies and to which a rate is applied to determine the reinsurance premium

Question 39

Working cover

Answer 39

An excess of loss reinsurance agreement with a low attachment point

Question 40

Co-participation provision

Answer 40

A provision in a reinsurance agreement that requires the primary insurer to retain a specified percentage of the losses that exceed its attachment point

Question 41

Per risk excess of loss reinsurance

Answer 41

A type of excess of loss reinsurance that covers property insurance and that applies separately to each loss occurring to each risk

Question 42

Loss occurrence clause

Answer 42

A reinsurance agreement clause that defines the scope of a catastrophic occurrence for the purposes of the agreement

Question 43

Per policy excess of loss reinsurance

Answer 43

A type of excess of loss reinsurance that applies the attachment point and reinsurance limit separately to each insurance policy issued by the primary insurer regardless of the number of losses occurring under each policy

Question 44

Per occurrence excess of loss reinsurance

Answer 44

A type of excess of loss reinsurance 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

Question 45

Clash cover

Answer 45

A type of per occurrence excess of loss reinsurance for liability loss exposures that protects the primary insurer against aggregations of losses from one occurrence that affects several insured or several types of insurance

Question 46

Extracontractual damages

Answer 46

Damages awarded to te insured as result of the insurer’s improperly handling a claim

Question 47

Excess of policy limits loss

Answer 47

A loss that results when an insured sues an insurer for failing to settle a claim within the insured’s policy limits when the insure had the opportunity to do so

Question 48

Aggregate excess of loss reinsurance

Answer 48

A type of excess of loss reinsurance that covers aggregated losses that exceed the attachment point, stated as a dollar amount of loss or as a loss ratio, and that occur over a specified period, usually one year

Question 49

Finite risk reinsurance

Answer 49

A nontraditional type of reinsurance in which the reinsurer’s liability is limited and anticipated investment income is expressly acknowledged as an underwriting component

Question 50

Securitization of risk

Answer 50

The use of securities or financial instruments (i.e., stocks, bonds, commodities, financial futures) to finance an insurer’s exposure to catastrophic loss

Question 51

Special purpose vehicle (SPV)

Answer 51

A facility established for the purpose of purchasing income-producing assets from an organization, holding title to them, and then using those assets to collateralize securities that will be sold to investors

Question 52

Insurance derivative

Answer 52

Financial contract whose value is based on the level of insurable losses that occur during a specific time period

Question 53

Insurance-linked security

Answer 53

A financial instrument whose value is primarily driven by insurance and/or reinsurance loss events

Question 54

Surplus note

Answer 54

A type of unsecured debt instrument, issued only by insurers, that has characteristics of both conventional equity and debt securities and is classified as policyholders’ surplus rather than as a liability on the insurer’s statutory balance sheet

Question 55

Strike price

Answer 55

The price at which the stock or commodity underlying a call option (such as a warrant) or a put option can be purchased (called) or sold (put) during a specified period

Question 56

Reinsurance program

Answer 56

The combination of reinsurance agreements that a primary insurer purchases to meet its reinsurance needs

Question 57

Underwriting risk

Answer 57

A measure of the loss volatility of the types of insurance sold by an insurer

Question 58

Catastrophe model

Answer 58

A type of computer program that estimates losses from future potential catastrophic events

Question 59

Insolvency clause

Answer 59

A clause that is required in reinsurance agreements indicating that the primary insurer’s bankruptcy does not affect the reinsurer’s liability for losses under the reinsurance agreement

Question 60

Intermediary clause

Answer 60

A clause that is required in reinsurance agreements indicating that the reinsurance intermediary is the reinsurer’s agents for collecting reinsurance premiums and paying reinsurance claims