Reinsurance - Review Questions
If your contract provided for a carrying forward of deficit from previous years and you had a loss of $600,000 the previous year, how much would you receive as a profit commission?
$5M - $1,250M - $2,5M - $ 250,000 - $ 600,000 = $ 400,000 x 20% = $ 80,000
You are an insurer. Calculate the amount of your cheque (20% profit commission) based on the following info for a treaty proportional reinsurance portfolio: Reinsurance commission $1,250M Reinsurance premium earned $5M Paid and outstanding losses $2,5M Reinsurer's expenses $250,000
$5M - $1,250M - $2,5M - $ 250,000 = $1M x 20% = $200,000
Identify 5 reasons why some types of business are excluded from reinsurance treaty coverages
- Risk too hazardous or historically unprofitable - Not permitted due to the reinsurer's own mandated guidelines, parent-company oversight, lack of retrocessional protection, or all three - Classes of business that are reinsured by other treaties are excluded to avoid duplication or to ensure clarity of intent - Many classes are so broad as to require the exclusion of certain sub-classes ie: liability excludes professional liability - Perils that exceeds the UW mandate of the companies and their reinsurers such as war or chemical, biological, nuclear threats - Risks that by law or market practice demand specific treatment i.e insurance for nuclear facilities
When a new surplus treaty replaces a similar surplus treaty, explain how the premium portfolio is calculated and how the loss portfolio is handled. Include in your answer any special provisions that may apply later.
????? Chap 4, p.9??
Compare and contrast facultative and treaty reinsurance
1) Facultative reinsurance: - Reinsurance protection on a single risk - An insurance company can voluntary offer to cede one individual risk and the reinsurer can voluntarily accept this risk. - Facultative = optional or discretionary - No transfer of risk takes place until the reinsurer accepts or "binds" the risk being offered. A binder is then given to the insurer. - The insurer needs to record the cession so that any future activity on the policy is communicated to the reinsurer. - Disadvantages: * It requires much time and effort. * Because this is on an offer and acceptance basis, coverage is not automatically in place until bound. * No guarantee of completion - the UW opportunity may be lost due to delays or failure to find reinsurance support. - Advantages: * Provides additional capacity * A policy that includes a risk element that is excluded under the treaty reinsurer can have that risk element removed from the policy and reinsured with a facultative reinsurer. * Offers reinsurance expertise, helping insurers on pricing and assessing unfamiliar pieces of business * It protects treaty experience. Treaty reinsurers reward good results with profit mechanisms. So the insurer will want to protect their good results and may choose to cede certain risks to the facultative market. 2) Treaty reinsurance: - Involves ceding an entire block of business (books or portfolio) - The contract is obligatory - the insurance company binds itself to cede and the reinsurer is obliged to accept all business that falls in the pre-agreed terms and conditions of the agreement. - There are no "pre-acceptance" approval rights. - Often referred to as automatic reinsurance - Reinsurance does not underwrite each risk. - Reinsurer underwrites the underwriter: assessing broad qualitative concerning the Cie and its management and reviewing quantitative and historical info about the reinsured portfolio and Cie performance in general. (financial str, past and projected performance, management experience, ...) - Treaty process: * Insurer and reinsurer must negociate levels of protection, terms, and compensation, and final documentation before the treaty's inception (or renewal) - Advantages: * Individual cessions are made with minimal documentations * Reinsurer receives only limited periodic summaries of premiums and losses on a monthly or quarterly basis * Cost of operating is minimal * Protection is in place the moment the risk is accepted by the insurance company. * The automatic nature means that the company can plan its UW activities for the coming year and conduct marketing with the knowledge that its UW capacity is in place.
Explain the difference between registered and unlicensed reinsurers.
1. Registered = licensed reinsurer: - Subject to OSFI guidelines and oversight, which protects policyholders and creditors as it has the power to intervene, control or discontinue operations. - Canadian Insurance Act allows the insurance company to take credit for recoverables from licensed reinsurers. - The reinsurance recoverables can be treated as assets that reduce those unearned premiums and outstanding losses that would otherwise represent a drain on the company's surplus 2. Unlicensed reinsurer: - Insurance company cannot take credit for recoverables. - Not subject to the OSFI guidelines and oversight - However, ceding Cies might have a good reason to place some of its reinsurance with unlicensed markets. - i.e local markets may lack the capacity to absorb large exposure or may lack the experience or interest to write certain specialized risks or perils. - They are better positioned to optimize their investments, taxes, and retrocessional costs while keeping staff, overhead and other operational expenses quite low. Disadvantages: - unlicensed reinsurance does not, of itself, transfer the capital strain of ceded premiums and loss liability from the insurance company to the reinsurer. - The responsability to evaluate the financial strength of and ensure access to the resources of an unlicensed reinsurer falls on the shoulders of the ceding Cie.
Identify and describe the services that an insurer might expect to receive from a reinsurer, in addition to the four basic functions of reinsurance.
????
Briefly explain the purpose of and outline the provisions usually found in the following proportional treaty wordings A) Attachment of Cessions Articles B) Follow the Fortunes Articles
A) Attachment of Cessions Articles (Chap 4, p.3) ????? B) Follow the Fortunes Articles In proportional treaties, the reinsurer will follow the fortunes of the insurance company, meaning that it will leave he management and the settlement of losses to the company. Follow the fortunes means that the reinsurer is bound in good faith to accept the Cie's interpretation of policy coverage and the Cie's judgment in settling losses. The reinsurer cannot delay these activities by second guessing the Cie's decisions. This also means that the Cie is bound in good faith to not distort or misrepresent claims that could disadvantage the reinsurer.
Briefly describe the following articles frequently found in proportional and non-proportional reinsurance treaties: A) Insolvency clause B) Signature clause
A) Insolvency clause - Under normal contract law, the insolvency of one party to a contract terminates the agreement. - For reinsurance, it is the intention of the regulators and trustees in bankruptcy that the reinsurer is not relieved of its obligations. - The reinsurance only indemnifies the insurer for claims actually paid. If a claim is not paid in full by the bankrupt insurer, any reduction in claim payout means that the reinsurer also has a reduced claim commitment - The Insolvency clause waives the right to merely indemnify and has to pay the claim as if the claim was paid in full by a solvent insurer. - So even if the insurer doesn't pay 100% of its claim, the reinsurer has to pay 100% of its full treaty obligation into the bankrupt estate. B) Signature clause - The treaty must be signed and counter-signed by an appointed official of each party. - If agreement is between the insurance cie and the reinsurer, a signature article can be added at the end of the document. - In the case of multiple reinsurers, a single maser treaty agreement can be produced to which multiple signature pages may be attached, each binding an individual reinsurer to the treaty document with their agreed participation.
Briefly describe the nature and operation of each of the following reinsurance markets: A) Insurance company B) Professional reinsurer C) Exchange D) Captive insurance company E) State reinsurance company
A) Insurance company: Two insurance companies would cross-share blocks of businesses between them. Cross-sharing is called reciprocity. If the 2 companies wrote business in different territories, exposure to catastrophic events (like conflagation) would be spread more effectively. There are few reciprocal agreements today. Some insurance companies had their own reinsurance departments and accept reinsurance from other insurance companies. Because of the poor results, the reinsurance departments disappeared. Today, some volume of reinsurance is still transacted between insurance companies, but these transactions tend to be between financially related parties. B) Professional reinsurer: Def: An insurance cie whose UW activities are confined to reinsurance. A Cie specifically licensed to write reinsurance is prohibited from writing direct insurance. Most professional reinsurers operate internationally. Reinsurers are able to write retrocessional business, some specialize in it. C) Exchanges: By the 17th century, insurers saw advantages to work in close proximity. This is how the Society of Lloyd's was formed. It is a marketplace for 90 companies (syndicates) that wish to transact insurance and reinsurance. Other exchanges: London Market, Bermuda Market D) Captive insurance company Def: A Cie formed to provide insurance to its controlling owner or to the companies associated with its owner. The captive owner may wish to self-finance any losses through its own domestic or offshore insurance or reinsurance subsidiary. Or the owner may be an insurance company wishing to cede business to its own captive reinsurer. A variation of the captive is the "reciprocal". It is a group of like businesses or organizations that may form a reciprocal insurance exchange in which they insure themselves and one another. This is because they have unique insurance needs that cant be serviced in the conventional insurance markets. E) State reinsurance company Governments have established public or governement backed reinsurance corps. Usually created to monitor or support their local insurance markets. They are charged with meeting specific needs within local markets or provide reinsurance that would not be otherwise available from commercial sources. Some of these reinsurers have gone beyond their local markets by either trading with other governement reinsurance or by competing commercially for reinsurance business worldwide.
Briefly explain the following Articles as they apply to non-proportional treaty wordings: A) Net Retained Lines B) Ultimate Net Loss C) Loss Occurrence D) Gross Net Premium Income
A) Net Retained Lines - Excess of loss treaty will only respond to the portion of the policy that is retained by the insurance company net of other reinsurance. I.e: If the company has purchased facultative or quota share in order to reduce its policy exposure, the excess of loss treaty will only respond to losses net of such other reinsurance. - Other reinsurance inures to the benefit of the excess treaty. - Failure to collect from other reinsurance will not penalize the reinsurers of this excess of loss contract. B) Ultimate Net Loss - Is the total sum that the insurance company is contractually obligated to pay as a result of a loss. - This amount may include: * damages * repairs or replacement * medical expenses * loss wages * legal expenses * investigation and other loss adjustment expenses Substract: * Any loss deductibles * Loss recoveries (salvage and subrogation) * Recoveries from other reinsurance = Ultimate Net Loss C) Loss Occurrence (or Loss event) - It is the intention of the treaty to aggregate related but separate policy liabilities into a single loss. - For first party classes (property) * Refers to catastrophic events * Aggregation of individual losses arising out of one event * Duration of events limited to 168 hours (one week) * Restriction of location to one province or contiguous provinces * Exceptions to the 168 hours: + Weather related events and riot or civil commotion - restricted to losses commencing during a period of 48 to 72 hours after these events started. - Three perils can be reinstated if they exceed their hour limitation. The event may be divided into 2 or more events: * 72 hours of weather-related and riot * 168 hours of forest fire - Perils - earthquake, winter freeze, ect - are limited to 168 hours and can't be reinstated. - For third party classes (casualty) * Refers to all policy liabilities arising from a single accident or series of accidents. * Single occurrence (event) but multiple casualty policies i.e car accident involving multiple vehicles and multiple policies D) Gross Net Premium Income Total of gross original premiums of those policies under the treaty Less: Cancellations and return premiums Less: Premiums paid by the insurance company for reinsurance
Explain how the following types of treaty function in property reinsurance: A) Quota Share Treaty B) Surplus Treaty
A) Quota Share Treaty Insurance company will seek to relieve a degree of finances so that it can write policies up to a certain value (ie $2M). To do so, it will cede a percentage (25%) of the policy liab, premiums and losses to a quota share reinsurer. Meaning the insurer keeps the rest (75% = Net) The shared capacity is on a pro rata basis. If a loss happens, it will be alocated to each by their percentages. Even loss adjustment expenses is included in there. Policy capacity is not the maximum possible policy loss. B) Surplus Treaty The insurance company can increase its UW capacity by adding a surplus treaty. By purchasing 3 lines, the dollar cession limit has grown (ie. $6M) over the one line net (net + quota share) of $2M = Policy capacity of $8M. Surplus = 75% Net Line = 25% Quota share = 25% of Net line Company absolute retention = Net line - Quota share Chap 7, p. 8 to 10
Describe the following types of non-proportional treaty used in marine insurance A) Working Excess of Loss B) Reporting Excess of Loss C) Aggregate Excess of Loss D) Backup Contracts
A) Working Excess of Loss (Chap 5, p. 17) - Any excess of loss with a retention and limit of liability within the expected losses = working excess or working layer. - Over a short period of time - one to three years - the treaty is expected to work = pay a loss or some small number of losses - Purpose is to spread large losses or unusual frequencies of large losses over a period longer than one year. This will stabilize the published results from year to year - 2 functions: 1. Spread loss 2. Provide UW capacity B) Reporting Excess of Loss ?? C) Aggregate Excess of Loss (Stop Loss Reinsurace) (Chap.2 p.26) - Used for specialty classes - crop insurance - It indemnifies the insurance Cie for the aggregate of all losses incurred over a specified period (usually 1 year or a growing season) in excess of an agreed company aggregate retention. - Both the Cie retention and the reinsurer's limit of liab may be expressed in dollars, but they will also be expressed as loss ratios = ratio of losses to subject premiums during the period to cover. - Treaty limitations - reinsurer will stipulate that the Cie retention is the greater of an agreed dollar amount or loss ratio and that the limit of liab is the lesser of a stated dollar amount or loss ratio. - Retention will be set at a level that reduces or limits (stops) a very bad loss year from deteriorating further. - It is common practice for the Cie to maintain its interest in the layers of stop loss by keeping a small percentage of participation. I.e 1st layer: 95% of 25% loss ratio not exceeding $5.5M excess of the greater of 90% loss ratio or $16.2M Cie wrote $20,956,000 of business 92% loss ratio 1. Adjusted retention 90% of $20,956,000 = $18,860,400, which is greater than $16.2M 2. Treaty loss 92%-90% = 2% 3. 2% of $20,956,000 subject premium = $419,120 4. Reinsurer only pays 95% of $419,120 = $398,164, and the Cie retains the other 5% = $20,956. D) Backup Contracts ??
Identify 6 circumstances under which the special termination provision found in most reinsurance treaties may be invoked
Also known as the "sudden death clause" 1) fail to meet the minimum capital requirements of the regulatory authority from the jurisdiction 2) go into liquidation or have a receiver appointed 3) cease writing new or renewal business under the direction or order of the regulatory authority 4) enter any arrangement which results in a change in the persons that legally or factually controlled such party at the time this Agreement became effective 5) in the case of the Company only, effect a reduction in the net retained share of the business reinsured without prior written consent from the Reinsurer
Define insurance and reinsurance
Insurance: For a small premium, the insured transfers the economic burden of a risk to an insurance company. The premium collected of the many is used to pay for the losses of the few. Based on the law of large numbers, it is possible to estimate future losses with some degree of accuracy. Reinsurance: It allows the insurers to buy insurance to help further spread the risk of random large losses or unexpected loss frequency. Reinsurance is a contractual agreement where the reinsurer, in return for a premium, agrees to indemnify an insurer (ceding company) against all or part of the loss or losses that the insurer is obligated to pay under the terms of the policy or policies that it has issued. Basically, the insurer cedes some of its exposure to the reinsurer
Discuss what an insurer would consider in deciding whether to use a reinsurance intermediary in the reinsurance process
The reinsurance intermediary will act on behalf of the ceding company. A broker will: - help select and evaluate appropriate reinsurers - contribute to the design of an optimal reinsurance program - conduct negotiations regarding reinsurance terms and conditions - document the resulting agreements - channel all accounting and communications between the company and its many reinsurers Broker will have authority to act in the behalf of the insurer via a broker of record letter issued by the ceding company. This also gives the reinsurer the assurance that they are working with the official intermediary. A broker can also provide other services: - Maintain relationships with a large circle of reinsurance markets, locally and abroad. He will know their strengths, preferences and capabilities of each - Closely track the financial STR of these reinsurers and advise clients companies of any weal or insolvent reinsurers - Assist the company in determining the financial contribution of a reinsurance contract or program - Help prepare the date to market that contract or program, approach reinsurers, negotiate terms and pricing - Draft and prepare contract documentations and conclude the formal placement and signing of the agreement For additional fee - other possible ancillary services: - Actuarial studies - Portfolio stress-testing, financial modelling, technical support - Catastrophe modelling - Greater involvement in the company's reinsurance needs In exchange, broker will be paid a fee or a percentage of the premium as a brokerage commission.
Advantages of the "gross account" approach vs the "net account" approach
chap 7, p.14 - No idea what it means