Chapter 12 - Reinsurance; Industry Organizations; The Customer

What are the functions of the Insurance Bureau of Canada (IBC)?

*Issues management*. - policy development, marketing, legal, public affairs. *Investigative services*. - insurance crime related investigations, auto & loss recovery services. *Insurance information*. - access to web based business applications.

Explain the difference between proportional and non-proportional reinsurance.

*Proportional*: a percentage of risk is transferred to the reinsurer & the reinsurer receives equal percentage of the premium & is responsible for that same percentage of loss. *Non-proportional*: Insurer pays all of loss up to agreed amount, and reinsurer pays which exceeds this. The premium charged by the reinsurer isn't proportional to the amount the reinsurer might pay.

FIVE (5) reasons for reinsuring:

1. To increase the insurer's capacity to write business. 2. To maintain a proper reserve/liability balance. 3. To reduce the effect of a catastrophic loss. 4. To provide stability in a fluctuating market. 5. To enable an insurer to cease operations.

How does reinsurance increase an insurer's capacity to write business?

It allows the insurer to *write a higher level of risk* and enable it to *accept larger amounts than it might be able to do on its own*.

How can an insurer deal with a sudden large increase in new business that leaves it with insufficient assets to meet reserve requirements?

One solution is for the insurer to *reinsure a greater portion of new business* and thus *decrease its reserve requirements* by *transferring the liability to the reinsurer*. This is an *alternative to* injecting *fresh capital* into the business or *cutting off business* until balance is achieved.

How can an insurer limit the amount of its losses in any given year?

Reinsurance can *smooth out of the effect* on an insurer's results. Ie. Insurer can determine the max amount of money its prepared to pay out in losses in a year and reinsure anything above that amount. Will have to pay premium but it will know what its worst result could be for the year.

What is facultative reinsurance?

Reinsurance placed on an *individual case basis*. Very flexible. Reinsurer may *decline* a risk, *accept* it, or *negotiate* different terms. This can be *time consuming* and *expensive*.

What is a priority?

The *priority* is that amount of any loss that the insurer will pay. In other words, *the insurer's retention*.

What are the goals of the Insurance Brokers' Association of Canada (IBAC)?

To *elevate the status* of independent insurance intermediaries *through professional development*. To *safeguard the public interest* by establishing *improved standards* of qualification and ethics.

Why do insurers reinsure?

To *transfer the risk*. Its the final link in the risk spreading chain.

What is the purpose of the Facility Association?

To provide insurance options to high risk drivers.

How is reinsurance used to reduce the effect of catastrophic losses?

Tornados, earthquakes, hailstorms can destroy large areas and may seriously strain an insurer's financial resources. Reinsurance spreads this risk among as many as possible.

How does a treaty operate?

Treaty is *automatic reinsurance without the insurer having to submit each risk to the reinsurer*. The insurer agrees to cede to the reinsurer all the risks coming within the scope of the agreement and the reinsurer agrees to accept all these risks.

Explain the difference between cession and retention.

When a company reinsures its liability with another company it cedes business. The amount ceded is called the *cession*. The amount the original insurer keeps for its own account is its *retention*.

Why are customers' perceptions of the insurance industry so important?

Without the customer there is no insurance industry. Even if the perceptions are wrong, the industry will be judged as if it were true.

What is the general purpose shared by many insurance industry organizations?

Organizations provide services such as loss prevention, education, fraud detection and prevention, rate making, standard policy wordings, gathering of industry statistics, and monitoring of legislation.

What is reinsurance?

To insure again by transferring to another insurance company all or part of a liability assumed. *Insurance for insurance companies*.

What are the goals of the Canadian Independent Adjusters Association?

To provide members with training, education, professional development opportunities. Develops and maintains high standards of professionalism through a defined code of ethics and fair practice policies.