Reinsurance

Why Are Pools Formed?

1. Needs not met in marketplace 2. Expertise 3. Reinsurance intermediates form reinsurance pools to provide reinsurance to their clients

Types of Excess of Loss Reinsurance

1. Per Risk 2. Catastrophe 3. Per Policy 4. Per Occurrence 5. Aggregate

Forms of Reinsurance Agreements

1. Pro Rata 2. Excess of Loss Reinsurance

Types of Reinsurance Transactions

1. Treaty (obligatory reinsurance) 2. Facultative (non-obligatory reinsurance)

Two ways that losses, premiums, and insurance are divided between the reinsurer and the primary insurer

1.Pro rata reinsurance (proportional reinsurance) 2.Excess of loss reinsurance (nonproportional reinsurance)

Who can reinsurance be purchased from? (Market Systems)

1.Reinsurance departments of primary insurers 2.Professional reinsurers 3.Reinsurance pools, associations, and syndicates

Six functions of reinsurance

1.Stabilization of loss experience 2.Large-line capacity 3.Financing 4.Catastrophe protection 5.Underwriting assistance 6.Withdrawal from a territory or class of business

Bordereau

A document showing details of all individual loss exposures ceded under pro rata treaty reinsurance.

Surplus relief

A flow of funds into an insurer's policyholders' surplus when policyholders' surplus has been reduced by the insurer's rapid growth in written premiums

Reinsurance Syndicate

A group of insurers or reinsurers involved in joint underwriting to insure major risks that are beyond the capacity of a single insurer or reinsurer,each syndicate member accepts predetermined shares of premiums losses, expenses, and profits (e.g. Syndicate).

Excess of Policy Limits Loss

A loss that results when an insured sues an insurer for FAILING TO SETTLE CLAIM WITHIN the insured's policy limits when the insurer had the opportunity to do so.

Finite risk reinsurance

A nontraditional reinsurance agreement for a limited amount of risk

Working cover

A per policy or per risk excess treaty with retention low enough for the reinsurer to expect heavy to moderate loss activity

Working cover

A per risk or per policy excess of loss treaty with such low retentions that the reinsurance expects moderate to heavy loss activity

Large-line capacity

A primary insurer's ability to provide a large amount of insurance under a single policy

Direct Writing Reinsurer

A professional reinsurer whose employees deal directly with primary insurers.

Co-Participation Provision

A provision in a reinsurance agreement that requires the primary insurer to retain a specified percentage of the losses that exceed its attachment point. IMPORTANT FACTOR IN RETENION CONSIDERATIONS.

Per policy excess of loss treaty

A reinsurance agreement applied to liability insurance policies under which a retention and a limit of coverage apply separately to each policy issued by the primary insurer Working

Per risk excess of loss treaty

A reinsurance agreement applied to property insurance polices under which a retention and a limit of coverage apply separately to each loss exposure insured by the primary insurer

Excess of loss facultative reinsurance

A reinsurance agreement for individual loss exposures in which the primary insurer pays all losses up to its agreed retention and the reinsurer pays losses in excess of the retention up to the reinsurance limit

Pro rata facultative reinsurance

A reinsurance agreement for individual loss exposures in which the reinsurer shares a pro rata portion of the losses and premium of the ceding insurer.

Catastrophe excess of loss treaty

A reinsurance agreement that helps the primary insurer manage a large accumulation of losses from a single event, such as a hurricane or an earthquake

Per occurrence excess of loss treaty

A reinsurance agreement that indemnifies the primary insurer when the losses for an occurrence exceed the primary insurer's retention

Aggregate excess of loss treaty

A reinsurance agreement under which the reinsurer begins to pay when all of the primary insurer's losses for some stated period of time exceed the retention stated in the treaty

Retrocession

A reinsurance agreement whereby a reinsurer (the retrocedent) transfers all or part of the reinsurance risk it has assumed or will assume to another reinsurer (retrosessionaire)

Reinsurance Pool

A reinsurance association that consists of several unrelated insurers or reinsurers that have joined to insure risks the individual members are unwilling to individually insure

Nonadmitted alien reinsurer

A reinsurer that is not licensed to do business in the US but operates there

Surplus share treaty

A type of pro rata reinsurance in which the policies covered are those whose amount of insurance exceeds a stipulated dollar amount, or line. • Does not cover policies with amounts of insurance that are less than the PI lines.

Quota share treaty

A type of pro rata reinsurance in which the primary insurer and the reinsurer share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) using a fixed percentage. • Max limit, above with the coverage reverts to PI • Best option to provide SURPLUS RELIEF

Pro Rata Insurance

A type of reinsurance in which the primary insurer and reinsurance proportionately share the amounts of insurance policy premiums and losses including loss adjustment expenses.

Treaty reinsurance

An agreement in which the primary insurer agrees to cede certain types of loss exposures, and the reinsurer agrees to accept the loss exposures that fall with the treaty

Facultative reinsurance

An agreement that is negotiated separately for each loss exposure the primary insurer wants to reinsure and that gives the reinsurer the right to accept or reject each loss exposure

Excess of loss reinsurance

An agreement that requires a reinsurer to pay that portion of a loss that exceeds the primary insurer's retention up to the reinsurance limit (nonproportional reinsurance)

Novation

An agreement under which one insurer or reinsurer is substituted for another. An approached used to eliminate PI liablity altogether.

Ceding Commission

An amount paid by the reinsurer to the primary insurer to cover part or all of the primary insurer's policy acquisition expenses.

Cut-through endorsement

An endorsement that provides that, in the event of the insolvency of the primary insurer, the reinsurer directly assumes the obligations of the primary insurer

Reinsurance Association

An organization of member companies that • Each member assumes a fixed % or $ amt. • Attached a reinsurance certificate to each policy.

Extracontractual Damages

Damages awarded to the insured as a result of the insurer's improperly handling a claim (bad faith). Not subject to the reinsuring agreement unless otherwise stated.

Intermediary clause

Makes the intermediary the agent of the reinsurer.

Increase Large-Line Capacity Benefit for Primary Insurer

PI can assume more significant risks

Portfolio reinsurance

Reinsurance that transfers to the reinsurer liability for an entire type of insurance, territory, or book of business after the primary insurer has issued the policies

Surplus drain

The act of an insurer taking money from surplus to pay initial expenses because income has not yet been earned

Line

The maximum amount of insurance or limit of liability that an insurer will accept on a single LE.

Reinsurance limit

The maximum amount that the reinsurer will pay for a claim and that is commonly stated in the reinsurance agreement

Insolvency Clause

The reinsurer pay contracted losses if the primary insurer becomes insolvent.

Retrocessionaire

The reinsurer that assumes all or part of the reinsurance risk accepted by another reinsurer.

Retrocedent

The reinsurer that transfers or cedes all or part of the insurance risk it has assumed to another reinsurer.

How does Reinsurance Facilitate Withdrawal From a Market Segment? And Why withdrawal?

Transfer by purchasing PORTFOLIO REINSURANCE - RI accepts liability for certain losses going forward. • Transfer by NOVATION - RI accepts all of liability for PI past/forward Unprofitable, undesirable or incompatible with strategic plan.

Functions of Facultative

• Provides Large Line Capacity for LE that exceed the limits of treaty reinsurance agreements. Reduce the primary insurer's exposure in a given geo area. • Insure a LE with atypical hazard characteristics • Insure particular classes of loss exposures that are excluded under treaty insurance

Types of Pro Rata Reinsurance (proportional)

• Quota Share • Surplus Share

How does Reinsurance Provide Surplus Relief

• Satisfies regulatory constraints on excess growth • Regulatory monitors PH surplus and 3 to 1 (300%) is considered out of bounds • Ceded commission to PA increases surplus and lowers capacity ratio. • Credits to the PI reduce the drain on the surplus and the ability to write new business

How Does Reinsurance Stabilize Loss Experience

• Stabilize PI financial image • Limit liability of loss exposures

Purpose of Reinsurance Intermediates

• Use more than one reinsurer • Help secure high coverage limits and catastrophe coverage • Access to various reinsurance solutions • Obtain favorable terms at a competitive