Untitled Deck

Question 1

3 Main types of excess of loss reinsurance

Answer 1

Risk XL, Aggregate XL, Catastrophe XL

Question 2

Risk XL

Answer 2

Indemnifies an insurer for the amount of an individual loss in excess of the excess point - in return for a premium.

Question 3

Aggregate XL

Answer 3

Relates to cumulative losses, where the aggregation may be by event, by peril or by class.

Question 4

Catastrophe XL

Answer 4

A form of aggregate XL covering severe losses (within the hours clause) that result from a specified event.

Question 5

4 Advantages of Excess of loss

Answer 5

• Allows the insurer to accept risks that could lead to large claims
• reduces the risk of insolvency from a large claim, an aggregation of claims or a catastrophe
• reduces claim fluctuations (and smoothes results)
• helps to make more efficient use of capital by reducing the variance of the claim payments (thus reducing capital requiremets).

Question 6

Working layer

Answer 6

The first layer above the cedant’s excess point, where moderate to heavy loss activity is expected by the cedant and reinsurer.

Question 7

Indexed limits

Answer 7

Where inflation has a significant effect on the cost of claims, a stability clause may be applied to the excess point.

Question 8

Commission on XL Re

Answer 8

Return commission and override commission are not normally relevant (since the reinsurer charges a premium to cover the risk, and commission would effectively just lower the premium). Profit commission is possible (in the lower layers).

Question 9

Deductibles on XL

Answer 9

It is possible the reinsurer will cover only a proportion of the claims within the layer, by applying a deductible.

Question 10

Define “Hours clause”

Answer 10

A clause within a catastrophe reinsurance treaty that specifies the limited period during which claims can be aggregated for the purpose of one claim on the reinsurance contract.

Question 11

Stop loss

Answer 11

A form of XL reinsurance that indemnifies the cedant against the amount by which its losses incurred during the specific period exceed either a predetermined monetary amount or a percentage of the company’s subject premiums (loss ratio) for the specific period.

Question 12

2 Types of financial reinsurance funding arrangements

Answer 12

Pre-funded arrangements, Post-funded arrangements

Question 13

Pre-funded financial re arrangement

Answer 13

The insurer pays premiums into a fund held by the reinsurer (which earns interest), and claims are paid from the fund.

Question 14

Post-funded financial re arrangement

Answer 14

The reinsurer pays the losses and the insurer pays back the losses over time.

Question 15

4 Specific financial reinsurance products

Answer 15

Time and distance deals, spread loss covers, financial quota share, industry loss warranties.

Question 16

Time and distance policies

Answer 16

The insurer pays the reinsurer a premium and in return, the reinsurer pays an agreed schedule of claim payments; this has the effect of discounting the reserves of the insurer for the time value of money.

Question 17

Spread loss covers

Answer 17

The insurer pays an annual or single premium to the reinsurer for the coverage of specified claims; these may be used to provide liquidity and security to the insurer and may be used for catastrophes.

Question 18

Financial quota share

Answer 18

This is quota share purchased in order to obtain reinsurance commissions for financing assistance.

Question 19

Industry loss warranties

Answer 19

These are a type of reinsurance that pay out based on industry losses rather than losses to individual insurers.

Question 20

Run-off reinsurance

Answer 20

Focus on the full-scale transfer of reserve development risks. It provides cover against the insurer’s earning volatility arising from past activities.

Question 21

6 Circumstances in which run-off solutions are commonly sought

Answer 21

Corporate restructuring, mergers and acquisitions, closing lines of business, economic changes in the value of the liability, regulatory, accounting or tax changes, legal developments.

Question 22

Adverse development cover

Answer 22

Involves the purchase of reinsurance cover for the ultimate settled amount of a block of business above a certain pre-agreed amount. Reserves are maintained by the insurer.

Question 23

Loss portfolio transfers

Answer 23

Involve the purchase of reinsurance cover for the ultimate settled amount of a block of business in its entirety. Reserves are transferred to the reinsurer along with all remaining exposure to the business.

Question 24

Define “novation”

Answer 24

The transfer of the rights and obligations under a contract from one party to another.

Question 25

2 Advantages of Loss portfolio transfers

Answer 25

They can improve the credit rating of the original insurer. The new insurer will gain diversification if not already in this area and achieve a larger client database.

Question 26

4 Disadvantages of Loss portfolio transfers

Answer 26

Assets may need to be realised to pass across the value of the reserves to the accepting insurer, if the new insurer defaults, this could damage the reputation of the original insurer, the transfer may require the buy-in of reinsurers where there are existing reinsurance arrangements covering the portfolio, there will be an associated cost to the original insurer of the risk transfer.