ch 6 Reinsurance,

Some insurers use ____ as an alternative to traditional ins

capital markets

excess of loss treaty definition

designed for protection against a catastrophic loss -it can be written to cover a single exposure, a single occurrence, or excess losses

cession is

the amount of insurance ceded to the reinsurer

two principle forms of reinsurance

facultative and treaty

the accounting department of an insurance company

prepares financial statements and develops budgets

reinsurance pool definition

an organization of insurers that underwrites insurance on a joint basis

the pro rata method definition

the ceding company and reinsurer agree to share losses and premiums based on some proportion

because premiums are paid in advance...

they can be invested until needed to pay claims and expenses

information systems are extremely important in the daily operations of insurers. Computers are...

used in many areas, including policy processing, simulation studies, market analysis, and policyholder services

the legal dept of an ins company

uses attorneys in advanced underwriting and estate planning

Reinsurance is...

an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance

securitization of risk definition

an insurable risk is transferred to the capital markets through the creation of a financial instrument, such as a catastrophe bond or futures contract

(reinsurance) the ceding company is

the primary insurer

excess method definition

the reinsurer pays only when losses exceed a certain level

retrocession is

when an insurer insures part of all of a risk with another insurer

catastrophe bonds definition

corporate bonds that permit the issuer of the bond to skip or reduce the interest payments if a catastrophic loss occurs (this is becoming a standard supplement to traditional insurance)

the unearned premium reserve

represents the unearned portion of gross premiums on all outstanding policies at the time of valuation

life insurance contracts are long-term so...

safety of principal is a primary consideration

property and liability insurers also provide....

many loss control services

investment income is extremely important for....

reducing the cost of insurance to policyowners and offsetting unfavorable underwriting experience

(reinsurance) the reinsurer is

the insurer that accepts the insurance from the ceding company

how reinsurance pools work (2 ways)

-each pool member agrees to pay a certain percentage of every loss -each pool member pays for his share of losses *below* a certain amount; losses *exceeding* that amount are then shared by all members in the pool

Reinsurance is used to (6)

-increase underwriting capacity -stabilize profits -reduce the unearned premium reserve -provide protection against a catastrophic loss -retire from business or from a line of insurance or territory -obtain underwriting advice on a line for which the insurer has little experience

two basic methods for sharing losses

-the pro rata method -excess method

facultative reinsurance definition (often used when primary insurer has an application for a large amount of insurance)

an optional, case-by-case method that is used when the ceding company receives an application for insurance that exceeds its retention limit

treaty reinsurance definition (all business that falls within the scope of the agreement is automatically reinsured according to the terms of the treaty)

means the primary insurer has agreed to cede insurance to the reinsurer, and the reinsurer has agreed to accept the business

in contrast to life insurance, property insurance contracts are....

short term in nature, and claim payments can vary widely depending on catastrophic losses, inflation, medical costs, etc

retention limit is

the amount of insurance retained by the ceding company

quota-share treaty definition

the ceding insurer and the reinsurer agree to share premiums and losses based on some proportion (like a 50-50 split would see the insurer pay the claim and would be reimbursed by the ceding company for 50% of that claim)

surplus share treaty definition

the reinsurer agrees to accept insurance in excess of the ceding insurer's retention limit, up to some maximum amount