Clark

Question 1

Facultative reinsurance

Answer 1

Designed and purchased separately for each individual risk of the ceding company

Question 2

Treaty reinsurance

Answer 2

Single contract allowing reinsurer to cover multiple risks of ceding company

Question 3

Quota Share reinsurance

Answer 3

Percent of premium and losses ceded is the same across all risks

Question 4

Surplus Share reinsurance

Answer 4

Designed to retain low risk policies and cede higher risk policies

Surplus percent = max[0%, min(Surplus Lines, IV - Retained Line)/IV]

Question 5

Per risk XL treaty

Answer 5

Reinsurer assumes losses between a retention and a limit for each risk

Protects cedant from large individual claims

Question 6

Per occurrence XL treaty

Answer 6

Reinsurer assumes losses between a retention and limit for each occurrence across multiple risks (i.e. CAT reinsurance)

Question 7

Aggregate XL treaty

Answer 7

Reinsure assumes losses between a retention and a limit for the aggregate of total losses from ceding company

Offers frequency protection

Question 8

Risks attaching basis

Answer 8

All policies that begin or renew during contract period are covered, regardless of when losses occur

Losses typically on PY basis, related to WP

Question 9

Losses Occuring basis

Answer 9

All claims that occur during contract are covered, regardless of policy inception

Losses typically on AY basis, related to EP

Question 10

Experience rating

Answer 10

Used mostly for proportional reinsurance

Uses adjusted historical experience

CAT load applied

Question 11

Exposure rating

Answer 11

Uses current risk profile and estimated loss distributions to calcluate premium

Question 12

Differences between surplus share treaty and excess insurance

Answer 12

Once surplus percent is established, reinsurer only responsible for that percent of loss

Question 13

Experience rating steps

Answer 13

1. Compile historical experience
2. Exclude CAT/shock losses
3. Develop and trend losses, on-level premiums and exposures
4. Select expected non-CAT loss ratio
5. Insert CAT loss ratio
6. Estimate other expenses and CR

Question 14

Sliding scale commission

Answer 14

Commission paid by reinsurer to ceding company varies with actual LR on treaty

Question 15

Balanced sliding scale plan

Answer 15

Commission at ELR equals expected commission

Question 16

Technical Ratio

Answer 16

Loss Ratio + Commission Ratio

Question 17

Carryforward provision

Answer 17

If actual LR exceeds LR for minimum commission, excess LR removed from minimum commission next year

Question 18

Approaches to pricing carryforward provisions

Answer 18

1. Only apply to current year’s LR (ignores future carryforward potential)
2. Look at expected ultimate commission ratio for a block of years together (ignores potential that contract might not be renewed)

Question 19

Exposure curve

Answer 19

Portion of loss capped at a given percent p of the insured value, relative to the total value of the loss

Question 20

For XL treaty, portion of expected ground up loss in a layer

Answer 20

P[(Retention + Limit) / IV] - P(Retention / Limit)

Question 21

Free cover

Answer 21

If there is no loss experience in the highest portion of the layer

Essentially giving away any excess coverage for which there is no loss experience

Question 22

How to eliminate free cover

Answer 22

Use experience rating for lower portion, then use exposure rating relativities to price higher portion of the layer

Question 23

Credibility for experience rating

Answer 23

1. Expected number of claims or $ of loss during historical period
2. Variance of projected loss costs (more stable, more credibility)

Question 24

Three layers of casualty per occurrence XL treaties

Answer 24

Working layer

Exposed excess

Clash covers

Question 25

Issues when using RAA data

Answer 25

Report lag can vary by company

Mix of attachment points/limits not cleanly broken out

Data may include A&E claims

WC – may include inconsistent tabular discounts

Question 26

Treating ALAE

Answer 26

1. Included with loss: treat as single amount when comparing to limit and retention
2. Pro-rata with loss: Calculate loss covered by treaty; same %age of ground-up ALAE also covered by treaty

Question 27

Handling ALAE with exposure rating

Answer 27

Question 28

Swing plans

Answer 28

If losses incurred by the contract increase, so will the premium

Provisional rate is amount paid up front

ELR = average LC / capped retro premium

If ELR <> expense load ratio, plan is not in balance

If provisional rate < capped retro premium, large cash flow advantage to cedant

Question 29

Reinstatements of property CAT covers

Answer 29

Allows ceding companies to “refill” treaty limit a certain number of times during policy period

Can be pro-rata as to amount or as to time (time not as popular due to seasonality of CATs)

Question 30

Payback period

Answer 30

Treaty limit / annual premium

Question 31

Rate on line

Answer 31

Annual premium / treaty limit

Question 32

Issue with risks attaching treaties

Answer 32

Potential for reinsurer to pay multiple times on same event

Question 33

Finite risk covers

Answer 33

Multiple year features

Loss sensitive features

Property CAT covers with lower maximum losses

Question 34

Two conditions for ceding company to consider finite risk covers reinsurance for accounting purposes

Answer 34

Reinsurer assumes significant insurance risk

Reasonably possible that reinsurer may realize a significant loss

Question 35

Complications in pricing finite risk covers

Answer 35

Reinstatement provisions

Expenses

Carryforwards

Changes in premium/commisions by year of treaty

Cancellation provisions

Question 36

Exposure rating using ILFs

Answer 36

Expected loss = Prem x ELR x [(ILF_a+L - ILF_a) / ILF_a]

Exposure rate = Expected Loss x ALAE load x “Other” loads

Question 37

Issues with capping trended losses at policy limits when experience rating

Answer 37

Insureds tend to purchase higher limits over time, so capping may understate future loss potential

Options: Ignore, OR trend limits and losses and assume limits increase at inflation

Disadvantages: Ignoring means historical limits may not reflect selected limits in the future, if trending limits, must “onlevel” premium