reinsurance

facultative reinsurance

non-obligatory per (one) exposure at a time, building, boat, plane have separate reinsurance contract for each individual exposure

treaty reinsurance

obligatory entire bob, portfolio -enter into arrangement, everything fits in treaty have to cede some component, doesn't matter

retention

portion of the risk kept by the primary insurer

reinsurance sources

professional reinsurers reinsurance from primary insurers

stabilize loss experience

put a cap on what losses look like

underwriting assisstance

-the experience and information of reinsurance can help primary insurers in rating, underwriting, and handling coverage -very true for small insurers or insurers entering new lines of business

provides surplus relief

An insurer's purchase of reinsurance to offset unusual drains against the insurer's surplus. The use of reinsurance for surplus relief purposes is most common when an insurer begins to rapidly expand its volume of written premium.

surplus relief

a primary insurer that writes new business suffers an initial reduction of surplus (surplus drain) because: -expenses of writing new policies are recognized immediately and -revenues (premiums) are not recognized until earned reinsurance reduces surplus drain (provides surplus relief) by: -increasing assets (cash) due to receipt of ceding commission and -reducing liabilities (unearned premiums) by transferring risk to reinsurer

catastrophe protection

based on entire book of business -protects against the high losses of cats by limiting the primary insurers losses per occurrence to a specified level of retention

reinsurance

contractual arrangement under which one insurer (primary insurer) transfers to another insurer (reinsurer) some or all of the loss exposures accepted by the primary insurer under insurance contracts it has issued or will issue in the future

retrocession

insurance for reinsurance company

withdrawal from a territory or class

insurers that want to withdraw can reinsure 100% of the unwanted business (portfolio reinsurance) -cancellation or non-renewal is often expensice and creates ill-will with insureds, agents, and regulators

provides large line capacity

lets us write policies that have large loads

large line capacity

refers to the ability of a primary insurer to provide high limit of insurance on a single loss exposure -state ins reg prohibit writing of an amount of insurance on any one risk less than 10% of surplus -using reinsurance, the primary insurer can keep its retention in a reasonable relationship to surplus and reinsure the rest

non proportional reinsurance

reinsurance company only get involved if IC losses exceed priority or retention limit reinsurer does not have proportional share in premiums and losses of the insurance provider

proportional reinsurance

reinsurer will receive a pro rated share of the premiums of all the policies sold by the IC being covered when claims are made, reinsurer also bears a portion of the losses

insurance losses

sometimes fluctuate widely as a result of demographic, economic, social, and natural forces....unstable -reinsurance can smooth fluctuations by: -limiting amount of any one loss that primary insurer must pay -limiting total losses the primary insurer must pay as the result of any one occurrence or during any one year

ceding commission

sometimes paid by the reinsurer to the primary insurer to cover some of the primary insurers expenses in selling and issuing the policies

functions of reinsurance benefits for primary insurers

stabilize loss experience provides large line capacity provides surplus relief protects against catastrophic losses provides underwriting assistance allows withdrawal from a territory or class of business

categories of reinsurance

traditional reinsurance: facultative and treaty

reinsurance premium

what the primary insurer pays to the reinsurer for the reinsurer to assume the insurance risk