Chapter 29 - Reinsurance (1) Flashcards
What is reinsurance
It is an arrangement whereby one party (the reinsurer), in consideration for a premium, agrees to indemnify another party (the cedant) against part or all of the liability assumed by the cedant under one or more insurance policies, or under one or more reinsurance contracts
What is original terms reinsurance
It involves the sharing of all aspects of the original contract
Hence the premium is split between the insurer and reinsurer in a fixed proportion and any claim is split in the same proportion
What are the main factor the reinsurer would consider when deciding on how much reinsurance commission to offer
PRO
- the PROFIT it expects to make from the business
- the RISKS that it is taking on ( for example, how uncertain the future claim experience is likely to be)
- how much it wants to OBTAIN the business, taking into account competition from other reinsurers
CUPPER F
- the COST of the reinsurer’s capital
- the extent of UNCERTAINTY associated with the future experience and with the insurer’s pricing basis
- the reinsurer’s PROFIT criteria
- the extent of any PROFIT-SHARING there may be between the two parties
- the expected level of the reinsurer’s other EXPENSES
- the extent of any RECOVERY of reinsurance commission that would be paid back when a policy lapses
- the FUTURE mortality experience
PUP
- the insurer’s PREMIUM rates
- the quality of the insurer’s UNDERWRITING
- the likely PERSISTENCY of the insurer’s business
In what ways might a particular reinsurer be more attractive to the insurer
the reinsurer might:
- have greater financial strength and so be less likely to default
- Offer broader coverage, eg. Accept higher sums assured or older-age applications
- Offer a profit-sharing arrangement, or a more generous one
- Offer a better commission
What are the two ways in which the amount to be reinsured can be specified
Individual surplus - the reinsured amount is the excess of the original benefit over the Cedant’s retention limit on any individual life
Quota share - a specified percentage of each policy is reinsured
What is risk premium reinsurance
The cedant reinsurers part of the sum assured or the sum at risk, i.e. the excess of the benefit payable over the reserve, on the reinsurer’s risk premium basis, which can be annually renewable or guaranteed
What is coinsurance on original terms
The insurance company sets the premium, and the reinsurance premium is in direct proportion to this.
The amount of commission agreed with the reinsurer sets the price of the reinsurance arrangement, and it is usually very significant
What is Coinsurance using level risk premium approach
The reinsurer sets a level premium for its share of the risk, based on its share of the full sum assured.
The insurer then calculates its own premium rates in the knowledge of the reinsurance premiums it will be paying. The reinsurance commission is usually not significant
What is risk premium reinsurance
The reinsurer sets the reinsurance premium rate. The risk premium operates as a recurring single premium, with each premium covering the immediate period of risk.
The reinsurer may cover a part of the full assured or a part of just the sum at risk. The risk premiums will vary from period to period due to changes in the sum at risk, age of policyholder, or as a result of rate reviews. The reinsurance commission is usually not significant
What is XOL reinsurance
It can be enacted on a risk basis, where the reinsurer pays any loss on an individual risk in excess of a predetermined retention
It can also be enacted on an occurrence basis where the aggregate loss from any one occurrence of an event exceeds the predetermined retention
What is catastrophe reinsurance
The aim of catastrophe reinsurance is to reduce the potential loss to the cedant due to any non-independence of the risks insured
What is stop loss reinsurance
It is when the reinsurer pays the aggregate net loss over the predetermined retention for a portfolio over a given time period, usually a year
What are the feature of financial reinsurance
- It were mainly devised as a means of improving the apparent accounting or supervisory solvency position of the cedant
- It only involves a small element, if any, of transfer of insurance risk from the cedant to the reinsurer
What is a contingent loan
This is when the reinsurer provides a loan to the cedant, but, as the repayment of the loan is contingent upon the stream of future profits being generated by the business, the cedant may not need to reserve for the repayment within its supervisory returns.
