1
Q
Reinsurance - Intro
A
- Critical to the insurance industry.
- Started in 1800s.
- Similar to a primary insurer.
- Does not change inherent nature of the risk.
- Reinsurance can be different in practice - most evident in treaty reinsurance.
2
Q
Reinsurance
A
The transfer to a reinsurer of all or part of an insurance risk from an insurer, or alternative vehicle for risk financing.
The insurance of the insurer.
Separate contract from primary policy.
3
Q
Reinsurer
A
Is an insurance company that accepts risk from and on behalf of another insurance company or alternative vehicle for risk financing.
4
Q
Speculative Risk
A
Chance of either loss or gain (ex. gambling)
5
Q
Pure Risk
A
No chance of gain, only loss (insurance).
6
Q
Cedent or Ceding Company
A
The insurer or alternative vehicle for risk financing that transfers the risk to the reinsurer.
7
Q
Ceding Commission
A
The percentage of the reinsurer’s share of the original insurance premium that is paid to the cedent by the reinsurer.
8
Q
Cession
A
The transfer of risk to a reinsurer, the amount of risk so ceded.
9
Q
Retention
A
The amount of risk that the insurer retains rather than cede to a reinsurer under a particular reinsurance arrangement.
10
Q
Retrocession
A
The transfer of all or part of a reinsurance risk from a reinsurer to one or more other reinsurers.
Reinsurance for reinsurers.
11
Q
Retrocessionaire
A
A reinsurer that assume risk on and behalf of another reinsurer.
12
Q
Types of Reinsurance
A
- Facultative
- Treaty
13
Q
Facultative Reinsurance
A
- Reinsurance placed on an individual risk or policy.
- Faculty refers to the right or ability of each party to the reinsurance transaction to accept or reject a specific risk.
14
Q
Treaty Reinsurance
A
- Agreement between the insurer and the reinsurer to reinsure a block or portfolio of business without the insurer’s having to submit each risk to the reinsurer.
15
Q
Methods of Reinsurance
A
- Proportional
- Non-Proportional
16
Q
Proportional Reinsurance
A
- A percentage of the risk is transferred to the reinsurer.
- Reinsurer receives that same percentage of the original premium and is responsible for that same percentage of each loss.
17
Q
Non-Proportional Reinsurance
A
- Insurer pays all of the loss up to an agreed amount (i..e their retention), the insurer then pays the part of the loss that exceeds the retention limit.
- Premium charged by the reinsurer will be part of the original insurance premium, but will not bear any proportional relationship to the amount of loss the reinsurer may pay.
18
Q
Benefits of Treaty Reinsurance
A
- Better spread of risk to reinsurer. Pricing more favourable.
- More economical and easier to administer
- Can save time.
19
Q
Underwriting Treaty Insurance
A
- Underwriting the underwriter
20
Q
Quota Share Treaty
A
- Simplest for of proportional treaty reinsurance.
- Both property and casualty.
- Reinsurer assumes same percentage of each risk in portfolio.
- Insurer must cede every risk.
- Reinsurer is obligated to accept every risk.
21
Q
Benefits of Quota Share Treaty
A
- Can protect against frequency and severity of losses.
- Protects the insurers net retention
- Helps with financial considerations
- Increases capacity
22
Q
Disadvantages to Quota Share Treaty
A
- Insurer does not retain as much of the premium.
- May not have much control of claims handling
23
Q
Surplus Treaty
A
- Proportional treaty
- Reinsurer share of risk is what remains after the insurer’s retention has been set.
- Percentage of each risk is not fixed, uw and reinsurer decide how much will be ceded one risk at a time.
- Insurers retention is called a line.
- Insurer must accept a reasonable share.
24
Q
Non-Proportional Facultative Reinsurance
A
Arranged on an excess of loss basis.
25
Non-Proportional Treaty Reinsurance
- Arranged on an excess of loss basis.
- Represents layers sitting on top of one another.
- Insurer retails bottom or primary layer, which is expected to have the majority of loss activity.
- Usually used when severity of loss is the consideration.
26
Per Risk Excess of Loss Treaty
- Mainly used for property risks.
- Treaty applies to each physical risk separately.
- Can be used separately or in conjunction with other treaties.
27
Catastrophe Excess of Loss Treaty
- All losses from the same event taken into consideration if it exceeds insurer's retention.
- Typical catastrophe excess of loss treaty applies to the ultimate net loss of the insurance company resulting from all losses due to the same event.
28
Ultimate Net Loss
The amount of loss that the insurer is called on to pay after recovering amounts due from all other reinsurance.
29
Advantages of Non-Proportional Reinsurance
- Can protect from severe losses by capping the amount paid by the insurer.
- Allows insurer to keep a larger portion of the premium.
- Allows for the possibility of more control for how claims are handled.
30
Disadvantages of Non-Proportional Reinsurance
- Danger the insurer will find that it set its retention incorrectly. Can effect financial results.
31
Functions of Reinsurance
Need for reinsurance can fall into four general categories:
- Capacity
- Catastrophe protection
- Stabilization of results
- Maket entrance or exit
32
Capacity
- Allows for higher limits of insurance than the insurer can provide alone.
33
Catastrophe Protection
- Aggregate loss may be too great for its resources.
34
Stabilization of Results
Can help smooth out the fluctuations in the insurer's operating results from one year to the next.
35
Market Entrance or Exit
- New ventures need time.
- Reinsurers can offer expertise.
- Can run off the book of business it no longer wants to be a part of and transfer the risk to a reinsurer.
36
Reinsurance Pricing
- Proportional: Premium for risk determined by insurer, reinsurer receives a portion.
- Non- Proportional: Based on a funding approach and formula guidelines.
- Reinsurance pricing determined heavily by actuarial analysis. Can look at the following:
* Loss history
* Current rates and premiums, and historical prospective changes
* Historical and prospective policy counts and policy limit profiles.
- Loadings are added to pure premium.
37
Long Layers
Reinsurers tend not to authorize long layers, that is, excess laters that are disproportionately large compare to the primary later or underlying layers of reinsurance.
38
Types of Reinsurers
- Direct writers
- Broker market reinsurers
- Reinsurance departments
39
Direct Writers
Deal directly with the insurer, no intermediaries involved.
40
Broker Market Reinsurers
Assume business through reinsurance brokers.
41
Reinsurance Departments
Primary insurers may assume reinsurance for other insurers or reinsurers. Not their core business.
42
Licensed Reinsurer
Registered with federal or provincial government.
Federal - can write business nationally.
Provincial - only in the same province.
Reinsurance regulation is focused on solvency.
43
Unlicensed Reinsurers
Not governed by regulatory board, not scrutinized by authorities for insolvency.
Limitations to what they can reinsure.
44
Selecting Reinsurer
- No one single way.
- Look at financial strength
- Claims payment terms
- Cash calls?
- Other services: help with UW? new products?
- How long in business
- Do they control claims and underwriting, or let insurer handle them
- Are their terms and conditions favourable?
45
Selecting an Insurer
- Look at all aspects of underwriting operations
- Guidelines used
- Management reports and how they're used
- Accounting department
- Claims department
- Insurer's financial statements
- Cash flow
- Collections department?
46
Reinsurance Contracts
- Facultative certificates
| - Treaty contracts
47
Facultative Certificates
Declaration page that includes:
- Name of insurer
- Policy number
- Name of insured
- Policy period of insurer
- Policy period of reinsurer
- Covergages reinsured
- Original policy limits
- Insurer's policy limits
- Insurer's retention
- Reinsurance limits
- Minimum retained premium
- Premium
- Adjustment Basis
- Instalment agreements
General Conditions:
- Claims expense
- Claims cooperation
- Insolvency issues
- Cancellation provisions
- Dispute resolution process
48
Treaty Contracts
- Preamble identifying parties to contract
- Class of business covered
- Exclusions
- Basis of coverage
- Ultimate net loss
- Limits of reinsurance
- Claims reporting procedures and provisions
- Commencement and termination of coverage
- Insolvency issues
- Dispute resolution process
C121
flashcards
Decks in class (9)
# Cards
