Reinsurance Principles and Concepts Review Questions

Briefly define reinsurance.

(insurance for insurers) the transfer from one insurer (primary insurer) to another (the reinsurer) of some or all of the financial consequences of certain loss exposures covered by the primary insurers policies.

List and briefly describe some of the more commonly used capital market alternatives to reinsurance.

*Catastrophe Bond *Catastrophe Risk Exchange *Contingent surplus note *industry loss warranty (ILW)' *Catastrophe option *line of credit *sidecar

List the factors primary insurers consider to determine their reinsurance needs.

*Growth Plans *Types of insurance sold *geographic spread of loss exposures *insurer size *insurer structure *insurer financial strength *senior management's risk tolerance

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

*Intermediaries and Reinsurance Underwriters Association *Brokers & Reinsurance Markets Association *Reinsurance Association of America

Identify the four factors, in addition to cost, that affect a primary insurer's retention selection.

*Maximum amount the primary insurer can retain *Maximum amount the primary insurer wants to retain *Minimum retention sought by the reinsurer *co-participation provision

Identify the five factors related to the selection of reinsurance treaty limits.

*Maximum policy limit *extra contractual obligations *loss adjustment expenses *clash cover *catastrophe exposure

Identify the two principal approaches that reinsurers use to allocate losses.

*Pro Rate Reinsurance *Excess of loss reinsurance

Identify three reasons why a primary insurer expecting rapid premium growth is likely to need additional reinsurance.

*Rapid growth can cuase a drain on a primary insurer's policyholder surplus *the loss ratio for a primary insurer's new business is likely to be less stable than the loss ratio for its established business which has undergone renewal underwriting

Describe the application of per risk excess of loss reinsurance.

*The attachment point and reinsurance limit apply SEPARATELY to each loss occuring to each risk (loss exposure)

Identify the two basic types of reinsurance transactions.

*Treaty Reinsurance *Facultative Reinsurance

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

*allows a primary insurer to assume more significant risks than its financial condition and regulations would otherwise permit

Explain why a finite risk reinsurance agreement typically has a multiyear term.

*allows the risk and losses to be spread over several years, while being subject to an aggregate limit for the agreement's entire year.

Explain how per occurrence excess of loss reinsurance functions.

*applies the attachment point and the reinsurance limit to the total losses arising from a single event, regardless of the number of policies or risks involved

Explain how the amount of insurance, the premium, and losses are allocated under a pro rata reinsurance agreement.

*are divided between the primary insurer and the reinsurer in the same proportions as the loss exposure.

Describe the type of losses that aggregate excess of loss reinsurance covers.

*covers aggregated losses that exceed the attachment point and occur over a stated period, usually one year

Describe the type of losses that finite risk reinsurance generally is designed to cover.

*designed to cover high severity losses. PG8.25

Describe the purpose of a minimum retention requirement.

*encourage the primary insurer to implement sound risk control, underwriting and loss adjustment practices

Explain the advantage, to the primary insurer, of a variable quota share treaty.

*has the advantage of enabling a primary insurer to retain a larger proportion of the small loss exposures that are within its financial capacity to absorb, while maintaining a safer and smaller retention on larger loss exposures.

List the six principal functions that reinsurance performs 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

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

*insuring large exposures *protecting policyholder's surplus from adverse loss experience *financing the insurer's growth

Explain why an insurer that is financially strong needs less reinsurance than a financially weaker one.

*it does not need surplus relief to increase its premium capacity *it needs less reinsurance to stabilize its loss ratio.

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

*limit its liability for a single loss exposure *limits its liability for several loss exposures affected by a common event *limit its liability for loss exposures that aggregate claims over time

Describe the effect a wide geographic spread of loss exposures may have on an insurer's reinsurance needs.

*may stablize the insurers loss ratio and minimize reinsurance nees, especially in property insurance PG 8.29

Contrast the reinsurance needs of primary insurers selling personal insurance with those selling commercial insurance.

*personal insurance loss exposures need relatively lower coverage limits *personal insurance loss exposures are more HOMOGENOUS and subject to fewer sever hazards than commercial insurance loss exposures. PG 8.28

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

*primary insurer transfers the liability for all outstanding policies to a reinsurer by purchasing a portfolio reinsurance.

Identify the three sources from which reinsurance may be purchased.

*professional reinsurers *reinsurance departments of primary insurers *reinsurance pools, syndicates, and associations

Describe the purpose of catastrophe excess of loss reinsurance»

*protects the primary insurer from an accumulation of retained losses that arise from a SINGLE catastrophic event.

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

*provides 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 two factors that determine the maximum amount that a primary insurer can retain*

*regulatory regulations *primary insurers financial strength

Describe the role of a reinsurance intermediary.

*represents a primary insurer and works with that insurer to develop a reinsurance program that is then placed with a reinsurer or reinsurers.

Explain why some excess of loss reinsurance agreements include co-participation provisions.

*requires the primary insurer to retain a specified percentage of the losses that exceed its attachment point.

Describe the circumstance in which a reinsurer will respond to a loss under an excess of loss reinsurance agreement.

*responds to a loss only when the loss excess the primary insurer's retention (attachment point)

Describe the distinguishing characteristic of quota share reinsurance.

*the primary insurer and the reinsure use a fixed percentage in sharing the amounts of insurance, policy premiums, and losses (including loss adjustment expenses)

Contrast the reinsurance needs of small primary insurers with those of large primary insurers.

*typically small primary insurers need proportionately more reinsurance to stabilize loss ratios than large primary insurers

Explain how per policy excess of loss reinsurance functions.

*used primarily with liability insurance *applies the attachment point and the reinsurance limit SEPARATELY to the losses occurring in each insurance policy and is triggered when a loss on a policy exceeds the attachment point.

Describe the distinguishing characteristic of surplus share reinsurance.

*when an underlying policy's total amount of insurance exceeds a stipulated dollar amount, or line, the reinsurer assumes the surplus share of the amount of insurance (the difference between the primary insurer's line and the total amount of insurance)

Explain what is meant by "stop loss reinsurance."

*when the attachment point is stated as a loss ratio

Identify the four functions of facultative reinsurance.

1 Provide large line capacity for loss exposures that exceed the limits of the treaty2 Reduce the primary insurers' exposure in a given geographic area3 Insure a loss exposure with atypical characteristics4 Insure a particular loss exposure that is excluded under treaty reinsurance

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

Claim-paying ability, reputation, and management competence

Describe the purpose of a retrocession.

One reinsurer transfers all or part of the reinsurance risk it has assumed or will assume to another reinsurer

Name the senior management characteristic that is most significant to its reinsurance decision making.

PG 8.31

Contrast treaty reinsurance and facultative reinsurance.

Treaty Reinsurance P8.14 -Reinsurer agrees in advance to reinsure all the loss exposures that fall within the treaty. -Provides primary insurers with the certainty needed to formulate underwriting policy and develop underwriting guidelines. Facultative Reinsurance 8.15 -Primary insurer negotiates a separate reinsurance agreement for each loss exposure that it wants to reinsure. Primary insurer is not obligated to purchase reinsurance and the reinsurer is not obligated to reinsure loss exposures submitted to it.

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

if treaty reinsurance agreements permitted the primary insurer to choose which loss exposures they ceded to the reinsurer, the reinsurer would be exposed to adverse selection