Study 4 - Proportional Treaty Agreements Flashcards
1
Q
Basis of Cessions Article
A
- sets out the basis on which cessions are to be made to the agreement
- Establishes whether treaty is a quota share, surplus, second surplus, or facultative obligatory agreement
- Quantifies the cession dimensions and discusses limitations on how the treaty may be used
2
Q
Quota Share Article
A
- a quota share treaty cedes to the reinsurer a fixed % of every risk falling within the scope of the agreement
- the insurance company is required to use the treaty and the reinsurer must accept the risks ceded
- the classes of business to be protected by the agreement are then described in broad but clear terms
- the term gross retention must be defined, more on that in other card
3
Q
Gross Retention
A
- must be defined using a company specific description of the ceding company’s other reinsurance agreements
- Refers to the amount subject to quota share protection that remains after deducting other reinsurance such as facultative placements or surplus cessions
- for property classes, the quota share treaty establishes a max gross retention. This max is then applied on some agreed property risk basis, such as “sum insured”, “each and every loss any one risk”, or “probable maximum loss”
- for casualty classes, the quota share treaty normally states a max original policy limit, such as “shall not exceed $___”
4
Q
Loss Exposure
A
- the reinsurer’s max loss exposure, or loss ceiling, is NOT in the contract
- that amount, whatever it may be, is the sum of the treaty’s maximum policy liability plus LAE’s
- the insurer’s responsibility to its policyholder extends beyond the policy limit to include, among other things, claims adjusting expenses and settlement expenses such as defense, investigation, court, and legal fees
- the reinsurer must assume its pro rata share of these additional loss amounts
5
Q
3 Limitations placed on the company’s cessions to the surplus treaty
A
- the maximum dollar amount ceded
- the maximum ratio of cession to retention, and
- the minimum dollars retained by the company if the surplus is to be used at all
6
Q
Commencement and Termination Article
A
Sets out:
- the date of treaty inception
- the anniversary date on which the treaty may be terminated
- the period of notice required to terminate
- the handling of any unearned premium portfolio, withdrawal, or runoff
7
Q
3 different ways of describing one basis of attachment
A
- Premiums-earned basis is often used in the context of accounting
- Policies-in-force basis may well appear in the context of either proportional or non-proportional underwriting
- Losses-occurring basis is generally used in the context of loss exposure, loss experience, and portfolio performance.
8
Q
Why is the losses-occurring basis of attachment the most preferred by insurance companies?
A
- Coming and going of individual reinsurance participants.
- Poor experience, changes in treaty terms, changing relationships between the insurance company and individual reinsurers
- These are all factors that lead participants (or their % participation) to change on anniversary dates - Simpler accounting.
- Preferred to have all reinsurers earning the same premium and paying their respective shares of the same losses
- If new reinsurers were to attach on an underwriting-year basis, then each changed reinsurer would experience differing UW and loss results. - Easier tracking.
- burdensome to track different results for each reinsurer
- additionally, the calculation of each reinsurer’s ceding commissions make it more difficult for the insurance company to project its own costs and net experience
9
Q
Premium Article
A
- Identifies the basis of cession attachment (policies written or policies in force)
- provides a very common definition of net subject written premium (gross written premiums plus additions less returns)
- the wording allows the insurance company to deduct premiums for inuring reinsurance, that is for the cost of reinsurance that protects both the company and the proportional reinsurers
10
Q
Commission Article
A
- Insurance company expects the reinsurer to share in the acquisition costs of the business ceded to the treaty
- These typically include commissions to brokers and agents, premium taxes, and some portion of the company’s management and overhead expenses
- The reinsurer will agree to pay to the company a reinsurance commission
- Ceded business that is profitable can be expected to lead to a higher reinsurance commission for the insurance company
11
Q
Accounts and Statistics Article
A
- Sets out the frequency, timing, and content of the reports of proportional treaty account balances
- On at least a quarterly basis, statistical information must be provided so that the reinsurer can meet its own statutory reporting requirements
- These statistics include info such as premiums less return premiums, paid losses, and paid LAE’s segregated by year of occurrence, outstanding losses segregated by year of occurrence, and unearned premiums
12
Q
Loss and Settlement Article
A
- Under proportional treaties, the reinsurer normally follows the fortunes of the insurance company, that is, leaving management and settlement of losses to the company
- In addition to the loss settlement amount, additional costs are outlined for specialists employed by the company and TPA expenses
- In-house expenses are excluded
13
Q
Elements of a Treaty Negotiation Process
A
- coverage
- structure
- pricing
- term (typically one-year agreement)
- reinsurance contracts are commonly priced using a rate that is applied to the subject premium
- rate on line is used to evaluate reinsurance pricing. This is the ratio of reinsurance premium divided by the limit purchased
14
Q
5 examples of typical acquisition costs of the business ceded to a treaty that a reinsurer is expected to share with the insurance company
A
- commissions to brokers
- commissions to agents
- premium taxes
- portion of management expenses
- portion of overhead expenses
