Reinsurance within the insurance market Flashcards
What is reinsurance?
- reinsurance is insurance for insurers
- insurers pay a premium to reinsurers to transfer risk
- another method of risk transfer
Who sells reinsurance?
- dedicated reinsurers
- Lloyd’s syndicates
- insurance companies who also write reinsurance
Who buy’s reinsurance?
- insurers
- reinsurers (via retro)
- captive reinsurers (captives)
- mutuals
What are the benefits of purchasing/buying reinsurance?
- increasing capacity
- Smoothing peaks and troughs (spreads the cost of large losses over a period of time)
- access to new markets
- assists starting new business lines
What are the benefits of selling reinsurance?
Access to new geographical areas and classes of business.
Define ‘Bordereau (x)’
Formatted spreadsheet on which risk and claim information can be presented to reinsurers, typically used for treaty (portfolio) reinsurance.
Define ‘Cede’
The act of sharing the risk with reinsurers - (insurers cede risk to reinsurers)
Define ‘Cedant’
The original insurer who is passing the risk to reinsurers.
Define ‘Cession’
The share of the risk passed to reinsurers.
Define ‘Collecting note’
The document used to present the claim to reinsurers under an excess of loss contract.
What is ‘Facultative reinsurance (FAC)’
Reinsurance of an individual risk.
What is ‘non-proportional reinsurance’
Reinsurance of the loss.
Losses excess of the ceding company’s retention limit are paid by the reinsurer, up to a maximum limit.
Reinsurance premium is calculated independently of the premium charged to the insured.
The reinsurance is frequently placed in layers.
Example:
- An insurer buys reinsurance excess of $1 million, with a limit of $5 million.
- If the insurer has a claim of $1.5m from the ground up, then they retain the first $1m and can claim $500,000 from their reinsurers.
- (it is below the $5 million limit)
- If the insurer has a claim of $7m, then they retain the first $1 million, AND the last $1 million, but they can claim $5 million from their reinsurers.
- (they retain the last $1 million because the claim pops out of their top layers/$5 million limit)
Examples of ‘non-proportional’ reinsurance?
- excess of loss
- stop loss
What is ‘proportional’ reinsurance?
Sharing the original risk.
Reinsurance where the premium and claims are shared between insurer and reinsurer in pre-agreed proportions, such as 30%.
Reinsurance premium and cover is decided by the pre-agreed % quota share being purchased.
Example:
- An insurer might purchase a 30% quota share reinsurance.
- For all ceded risks, 30% of the premium will be paid to reinsurers, and in return they will reimburse 30% of the claims that the insurer has on those ceded risks.
- An insurer writing a risk with a premium of $1,000 will cede $300 to the reinsurer.
- If there is a claim for $500,000 then the reinsurer will reimburse $150,000 being 30% of the claim.
Define ‘Reinstatement’
“bringing the layer back to life”
In NON-proportional reinsurance the reinsurer can reinstate a layer at the cost of an additional premium.
Some contracts provide unlimited reinstatements, but most have a set no. e.g. 3.
