Study 10 - Reinsurance and Liability Claims

Question 1

Reinsurance

Answer 1

Insurance purchased by an insurance company from another insurance company (reinsurer) to provide protection against large losses on cases it has already insured

Question 2

Reinsurance permits a company to:

Answer 2

• Protect its overall insurance operations against unexpected high losses
• Reduce its exposure on a specific insurance risk to more acceptable levels

Question 3

The process of transferring risk from an insurer to a reinsurer is called “ceding”, and the amount ceded is called the “cession”. The reinsurer pays a commission to the insurer and an override on the premiums ceded to cover the insurance company’s:

Answer 3

• Commission paid to the primary broker
• Overhead costs, including taxes

Question 4

2 main types of reinsurance

Answer 4

1. Proportional (aka contributing or pro rata)
2. Non-proportional (aka non-contributing or excess)

Question 5

Proportional reinsurance

Answer 5

• Insurance company cedes a % of the risk to the reinsurer and pays the same % of the original premium to the reinsurer
• In return, should a claim arise, the reinsurer will reimburse the insurance company in the same proportion

Question 6

Non-proportional reinsurance

Answer 6

• The insurer pays the loss up to an agreed amount (retention)
• The reinsurer then pays the part of the claim that exceeds the retention, up to a policy limit, as agreed

Question 7

2 basic methods of reinsurance

Answer 7

1. Facultative
2. Treaty

Question 8

Facultative Reinsurance

Answer 8

• Placed on an individual case basis
• Can be placed on a proportional or non-proportional basis
• Mainly used when the risk is large, unusual, or hazardous

Question 9

Treaty Reinsurance

Answer 9

• Provides automatic coverage to the insurance company on an agreed portfolio of business
• The reinsurer is not involved with any underwriting of the risks ceded under the treaty
• The main underwriting considerations are based on the insurance company’s reputation, the experience and quality of its staff, underwriting practices and results, and their overall financial standing

Question 10

Adjusters must be mindful of commercial agreements when considering the legal liability on the part of the insured. They can include:

Answer 10

• Leases of premises or equipment
• sales transaction documents (purchase orders, invoices, etc.)
• other contracts that govern commercial relations, such as:
  
  • condo declarations, bylaws, and regulations
  • hold-harmless agreements
  • construction contracts
  • bonds, licenses, permits, and bid documents to or from govt entities

Question 11

Claims Investigation Process

Answer 11

1. Taking Statements
2. Conducting the Investigation
3. Estimating the loss
4. Determining liability and limits
5. Reaching a settlement