Principles Ch. 7 Reinsurance

Describe the role of a reinsurance intermediary.

Reinsurance intermediaries generally represent a primary insurer and work with that insurer to develop a reinsurance program that is then placed with a reinsurer or reinsurers.

Distinguish between working cover and catastrophe cover in excess of loss agreements.

A working cover is written in anticipation of a regular pattern of reinsured losses. Rating is typically an experience-sensitive mechanism. A catastrophe cover provides protection for the possible, but improbable, event that would involve many bonds.

Describe a pro rata reinsurance agreement.

In a pro rata reinsurance agreement, the reinsurer assumes a proportional share of the obligations that the surety assumes. In return, the reinsurer receives a proportional share of the premium the surety charges.

Describe how increasing its large-line capacity allows an insurer to grow.

Increasing large-line capacity allows a primary insurer to assume more significant risks than its financial condition and regulations would otherwise permit.

Describe excess of loss reinsurance.

Under excess of loss reinsurance, the ceding company is indemnified for the portion of a loss that exceeds a specified amount, known as the ceding company's net retention. The indemnification is usually subject to a fixed limit of reinsurance.

List the six principal functions that reinsurance performs for primary insurers.

Although several of its uses overlap, reinsurance is a valuable tool that can perform six principal functions for primary insurers: • Increase large-line capacity • Provide catastrophe protection • Stabilize loss experience • Provide surplus relief • Facilitate withdrawal from a market segment • Provide underwriting guidance

Explain why primary insurers usually make treaty reinsurance agreements so their underwriters do not have to exercise discretion in using reinsurance.

Primary insurers usually make treaty reinsurance agreements so their underwriters do not have to exercise discretion in using reinsurance. If treaty reinsurance agreements permitted primary insurers to choose which loss exposures they ceded to the reinsurer, the reinsurer would be exposed to adverse selection.

Describe some of the practical business goals that reinsurance can help an insurer achieve.

Reinsurance helps an insurer achieve several practical business goals, such as insuring large exposures, protecting policyholders' surplus from adverse loss experience, and financing the insurer's growth.

Describe the function of reinsurance pools, syndicates, and associations.

Reinsurance pools, syndicates and associations provide member companies the opportunity to participate in a line of insurance with a limited amount of capital—and a proportionate share of the administrative costs—without having to employ the specialists needed for such a venture.

Identify the four function of facultative reinsurance.

Facultative reinsurance serves these four functions: • Facultative reinsurance can provide large line capacity for loss exposures that exceed the limits of treaty reinsurance agreements. • Facultative reinsurance can reduce the primary insurer's exposure in a given geographic area • Facultative reinsurance can insure a loss exposure with atypical hazard characteristics and thereby maintain the favorable loss experience of the primary insurer's treaty reinsurance and any associated profit-sharing arrangements • Facultative reinsurance can insure particular classes of loss exposures that are excluded under treaty reinsurance

Describe the purpose of a retrocession.

Under a retrocession, one reinsurer, the retrocedent, transfers all or part of the reinsurance risk that it has assumed or will assume to another reinsurer, the retrocessionaire.

Briefly define reinsurance.

Reinsurance is the transfer from one insurer to another of some or all of the financial consequences of certain loss exposures covered by the primary insurer's policies.

Explain how a primary insurer may completely eliminate the liabilities it has assumed under the policies it has issued.

A primary insurer can completely eliminate the liabilities it has assumed under the insurance policies it has issued through a novation. A novation is not considered portfolio reinsurance because the substitute insurer assumes the direct obligations to insureds covered by the underlying insurance.

Name the three ways in which a primary insurer can use reinsurance to stabilize its loss experience.

A primary insurer can stabilize loss experience by obtaining reinsurance to accomplish any, or all, of these purposes: • Limit its liability for a single loss exposure • Limit its liability for several loss exposures affected by a common event • Limit its liability for loss exposures that aggregate claims over time

Describe work program surplus share treaties.

A variation of pro rata arrangements for contract surety is a work program treaty. The determining factor for risk sharing is the surety's expression of aggregate risk appetite or the work program for each contractor. A table of reinsurance, which shows the reinsurance agreement, is drawn to cover exposure limitations agreeable to the parties.

Identify the three sources from which reinsurance may be purchased.

Reinsurance can be purchased from three sources: • Professional reinsurers • Reinsurance departments of primary insurers • Reinsurance pools, syndicates, and associations

Distinguish between quota share and surplus share reinsurance.

In quota share reinsurance, the surety cedes a fixed percentage of each covered bond. After a decision on the percentage, the division of premiums and losses is automatic. The contract specifies the amount of the ceding commission. In surplus share reinsurance, the surety retains a variable amount of the exposure on each bond or policy, subject to specific restrictions. The surety cedes the remainder of the exposure up to the cession limit to the reinsurer. The risk-sharing provisions establish the minimum limits to qualify a bond for cession and define the amount of exposure for the ceding company to retain.

Contrast treaty reinsurance and facultative reinsurance.

In treaty reinsurance, the reinsurer agrees in advance to reinsure all the loss exposures that fall within the treaty. Although some treaties allow the reinsurer limited discretion in reinsuring individual loss exposures, most treaties require that all loss exposures within the treaty's terms must be reinsured.

Name the factors a primary insurer should evaluate when considering a reinsurer.

The primary insurer should evaluate the reinsurer's claim-paying ability, reputation, and management competence before entering into the reinsurance agreement.

List three of the most widely known reinsurance professional and trade associations.

Three of the most widely known reinsurance professional and trade associations are these: • Intermediaries and Reinsurance Underwriters Association (IRU) • Brokers & Reinsurance Markets Association (BRMA) • Reinsurance Association of America (RAA)

Explain the purpose of vertical participation in excess of loss reinsurance.

Vertical participation, a reinsurance relationship in which the ceding company sustains a fixed percentage of losses in excess of the retention, sustains the ceding company's pecuniary involvement throughout the claim and is intended to preclude relaxation of underwriting or of loss settlement practices.