Assignment 7

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 limit for each contractor. A table of reinsurance , which shows the reinsurance agreement, is drawn to cover exposure limitations agreeable to the parties.

Go over Application Question 3-7 on page 7.10.

Go over Application Question 3-7 on page 7.10.

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.

Work program limit

The surety's expression of the aggregate risk appetite for each contractor.

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), and Reinsurance Association of America (RAA)

Insurance risk

Uncertainty about the adequacy of insurance premiums to pay losses. In reinsurance, the term risk often refers to the subject of insurance, such as a building, a policy, a group of policies, or a class of business.

Describe excess of loss reinsurance (nonproportional 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. A type of reinsurance in which the primary insurer is indemnified for losses that exceed a specified dollar amount.

Policyholders' surplus

Under statutory accounting principles (SAP), an insurer's total admitted assets minus its total liabilities. An insurer's net worth as reported on the financial statement prescribed by state insurance regulators. It represents the financial resource the primary insurer can draw on to pay unexpected losses.

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.

Ceding commission

A amount paid by the reinsurer to the primary insurer to cover part or all of the primary insurer's policy acquisition expenses. These expenses consists primarily of commissions paid to producers, premium taxes, and underwriting expenses (such as policy processing and servicing costs, and risk control reports).

Table of reinsurance

A chart that shows the reinsurance agreement, including the exposure limitations agreeable to the parties.

Work program treaty

A contract in which the work program line determines risk sharing for reinsurance.

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.

Direct writing reinsurer

A professional reinsurer whose employees deal directly with primary insurers.

Retention and limits clause

A reinsurance treaty clause that specifies the primary insurer's minimum net retention and the maximum amount of insurance that the primary insurer can cede to the reinsurer.

Surplus relief

A replenishment of policyholders' surplus provided by the ceding commission paid to the primary insurer by the reinsurer.

Net retention

A specified amount above which the ceding company is indemnified for a part of the loss.

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. For this reason, rating is typically an experience-sensitive mechanism. An excess of loss reinsurance agreement with a low attachment point. A catastrophe cover provides protection for the possible, but improbable, event that would involve many bonds.

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.

Occurrence

An accident, including continuous or repeated exposure to substantially the same general harmful conditions. The word "occurrence" shall mean any one act or event or the act or omissions of one person, or of any two or more persons acting in collusion, or in which said person or persons are concerned or implicated regardless of the number of bonds or insureds involved.

Facultative certificate of reinsurance (or facultative certificate)

An agreement that defines the terms of the facultative reinsurance coverage on a specific loss exposure. It is attached to the primary insurer's copy of the policy being reinsured.

Association

An association consists of member companies that use both reinsurance and risk-sharing techniques. In many cases, the member companies issue their own policies; however, a reinsurance certificate is attached to each policy under which each member company assumes a fixed percentage of the total amount of insurance. It's an organization of member companies that reinsure by fixed percentage the total amount of insurance appearing on policies issued by the organization.

Professional reinsurer

An insurer whose primary business purpose is serving other insurers' reinsurance needs.

Briefly define reinsurance.

Commonly referred to as "insurance for insurers," 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. The loss exposures transferred, or ceded, by the primary insurer could be associated with a single subject of insurance (such as a building), a single policy, or a group of policies.

Reinsurance agreement

Contract between the primary insurer and reinsurer that stipulates the form of reinsurance and the type of accounts to be reinsured. It specifies the terms under which the reinsurance is provided.

Identify the four functions of facultative reinsurance.

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 a pro rata reinsurance agreement (proportional 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. A reinsurance agreement that divides the amount of insurance, the premium, and the losses between the primary insurer and the reinsurer in the same agreed proportions for each risk.

Reinsurance pool

In a reinsurance pool, a policy for the full amount of insurance is issued by a member company and reinsured by the remainder of the pool members according to predetermined percentages. It's is 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.

Syndicate

In a syndicate, each member shares the risk with other members by accepting a percentage of the risk. These members collectively constitute a single, separate entity under the syndicate name. It's 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 premium, losses, expenses, and profits.

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. 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. 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. A type of pro rata reinsurance in which the policies covered are those whose amount of insurance exceeds a stipulated dollar amount, or line.

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. In facultative reinsurance, the primary insurer negotiates a separate reinsurance agreement for each loss exposure that it wants to reinsure. The primary insurer is not obligated to purchase reinsurance, and the reinsurer is not obligated to reinsure loss exposures submitted to it.

Clash losses

Losses from a single occurrence that involves more than one bond.

Describe the purpose of a retrocession.

One insurer, the retrocedent, transfers all or part of the reinsurance risk that it has assumed or will assume to another reinsurer, the retrocessionaire.

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.

Identify the three sources from which reinsurance may be purchased.

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

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.

Reinsurance intermediary

Reinsurance intermediates generally represent a primary insurer and work with that insurer to develop a reinsurance program that is then placed with a reinsurer or reinsurers. An intermediary that works with primary insurers to develop reinsurance programs and that negotiates contracts of reinsurance between the primary insurer and reinsurer, receiving commission for placement and other services rendered.

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.

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. The reinsurer accepts all of the liability for certain loss exposures covered under the primary insurer's policies, but the primary insurer must continue to fulfill its obligations to its insureds.

Retention

The amount retained by the primary insurer in the reinsurance transaction. It can be expressed as a percentage of the original amount of insurance or as a dollar amount of loss.

Reinsurance premium

The consideration paid by the primary insurer to the reinsurer for assuming some or all of the primary insurer's insurance risk.

Adverse selection

The decision to reinsure those loss exposures that have an increased probability of loss because the retention of those loss exposures is undesirable.

Line

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

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.