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Flashcards in Ch 10 Deck (152):
0

The insurer that assumes some or all of the potential costs of insured loss exposures of the primary insurer in a reinsurance contractual agreement.

Reinsurer

1

The transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium, to indemnify another insurer (the primary insurer) for some or all of the financial consequences of certain loss exposures covered by the primary's insurance policies.

Reinsurance

2

In reinsurance, the insurer that transfers or cedes all or part if the insurance risk it has assumed to another insurer in a contractual arrangement.

Primary insurer.

3

Contract between the primary insurer and reinsurer that stipulates the form of reinsurance and the type of accounts to be reinsured.

Reinsurance agreement

4

Uncertainty about the adequacy of insurance premiums to pay losses.

Insurance risk

5

The amount retained by the primary insurer in the reinsurance transaction.

Retention

6

The consideration paid by the primary insurer to the reinsurer for assuming some or all of the primary insurer's insurance risk.

Reinsurance premium

7

An amount paid by the reinsurer to the primary insurer to cover part or all of the primary insurer's policy acquisition expenses.

Ceding commission

8

A reinsurance agreement whereby one reinsurer (the retrocedent) transfers or cedes all or part of the insurance risk it has assumed to another reinsurer.

Retrocession

9

The reinsurer that assumes all or part of the reinsurance risk accepted by another reinsurer.

Retrocessionaire

10

The reinsurer that transfers or cedes all or part of the insurance risk it has assumed to another reinsurer.

Retrocedent

11

List the Six Principal Functions of Reinsurance

1. Increase Large Line Capacity
2. Provide Catastrophe Protection
3. Stabilize Loss Experience
4. Provide Surplus Relief
5. Facilitate Withdrawal from a Market Segment
6. Provide Underwriting Guidance

12

An insurer's ability to provide larger amounts of insurance for property loss exposures, or higher limits of liability for liability loss exposures, than it is otherwise willing to provide.

Large-line capacity

13

The maximum amount of insurance or limit of liability that an insurer will accept on a single loss exposure.

Line

14

Which influences are the maximum amount of insurance (line) subject to.

-maximum amount of insurance allowed by insurance regulations (can't retain more than 10% of surplus in one risk)

-Size of potential loss(es) that can be retained without impairing earnings or surplus.

-specific characteristics of a loss exposure

-amount, types, cost of reinsurance.

16

An insurer whose primary business purpose is serving other insurers' reinsurance needs.

Professional reinsurer

17

A professional reinsurer whose employees deal directly with primary insurers.

Direct writer reinsurer

18

An intermediary that works with primary insurers to develop reinsurance programs and that negotiates contracts of reinsurance between the primary insurer and reinsurer, receiving commission for placement and other services rendered.

Reinsurance intermediary

19

What are the three sources of reinsurance.

1) professional reinsurers
2) reinsurance departments of primary insurers
3)reinsurance pools, syndicates, and associations

20

Who do professional reinsurers evaluate the primary insurer before entering into a reinsurance agreement?

The treaty reinsurer underwrites the primary insurer and the loss exposures being ceded.

21

What do reinsurers look at when evaluating a primary insurer?

Financial statements, info from financial rating services, info from insurance department, insurers experience, reputation, and management.

22

Groups of insurers that share the loss exposures of the group, usually through reinsurance.

Reinsurance pools, syndicates and associations

23

A reinsurance association that consists of several unrelated insurers or reinsurers that have joined to insure risks the individual members are unwilling to individually insure.

Reinsurance pool

24

A group of insurers or reinsurers involved in joint underwriting to insure major risks that are beyond the capacity of a single insurer or reinsurer; each syndicate member accepts predetermined shares of premiums, losses, expenses and profits.

Syndicate

25

An organization of member companies that reinsure by fixed percentage the total amount of insurance appearing on policies issued by the organization.

Association

26

Founded in 1967. Composed of intermediaries and reinsurers thy broker or assume non-life treaty reinsurance. Also conduct claim seminars and publish a magazine.

Intermediaries and Reinsurance Underwriters Association (IRU)

27

Represents intermediaries and reinsurers that are primarily engages in US treaty reinsurance business obtained through reinsurance brokers.

They identify and address industry-wide operational issues and are described as a forum for treaty reinsurance professionals.

Big importance; contract wording (publish contract wording reference book)

Brokers & Reinsurance Markets Association

28

Headquartered in DC, a non-profit trade association of professional reinsurers and intermediaries. All members at US companies or US branches of international reinsurers.

Activities: provide into to interested parties outside the industry, member advocacy and lobbying, aggregate data, conduct seminars

Reinsurance Association of America (RAA)

29

This type of reinsurance uses one agreement for an entire class or portfolio of loss exposure. Also known as obligatory reinsurance.

Treaty reinsurance

30

This form of reinsurance uses a separate agreement or each loss exposure it wants to reinsure.

Facultative (or non-obligatory)

31

The foundation of most reinsurance programs.

Treaty reinsurance

32

T or F: Most, but not all, treaty reinsurance agreements allow a primary insurer to pick and choose which exposures they want to reinsure.

F. Most require the primary insurer to cede all eligible loss exposures to the reinsurer.

33

What would happen of primary insurers could choose which exposures to cede?

Adverse selection

34

The decision to reinsure those loss exposures thy have an increased probability of loss because retention of those loss exposures is undesirable.

A adverse selection.

35

Reinsurance allows the primary insurer to increase its ________ _______ while limiting the financial consequences of potential losses.

Market share

36

Reinsurance can help an insurer stabilize loss experience. Why is stabilizing loss experience important?

Volatile loss experience can:
-affect stock value
-alter financial rating
-cause abrupt changes in approaches taken in managing the underwriting, claim, and marketing departments
-undermine the confidence of the sales force
-lead to insolvency (extreme cases)

37

How does reinsurance stabilize loss experience?

Smooth peaks and valleys in an insurer's experience curve.

38

Insurers looking to stabilize loss experience can obtain reinsurance to accomplish these purposes:

1) Limit its liability for a single loss exposure
2) Limit its liability for several loss exposures affected by a common event.
3) limit its liability for loss exposures that aggregate claims over time

39

When an insurer immediately recognizes expenses while only gradually recognizing revenue, its policyholders' surplus will _____ as its capacity ratio increases.

decrease

40

A replenishment of policyholders' surplus provided by the ceding commission paid to the primary insurer by the reinsurer. An insurer will usually use reinsurance for this when rapidly expanding premium volume.

Surplus relief

41

What is the maximum ratio of written premiums to policyholders' surplus?

3 to 1

42

What effect does paying ceding commissions to a reinsurer have on the insurer?

It replenishes surplus which facilitates the primary insurer's premium growth and lowers its capacity ratio.

43

Which three options does an insurer have when withdrawing from a market segment?

1) Stop writing new insurance policies and continue in-force insurance until all policies expire ("run-off")

2) Cancel all policies (if regulations allow) and refund unearned premiums to the insured.

3) Withdraw from the market segment by buying portfolio reinsurance

44

Reinsurance that transfers to the reinsurer liability for an entire type of insurance, territory or book of business after the primary insurer has issued the policies.

Portfolio reinsurance

45

The only exception to the general rule that reinsurers do not accept all of the liability for specified loss exposures of an insurer

Portfolio reinsurance

46

When a primary insurer purchases portfolio reinsurance, who handles the claims?

The primary insurer but the reinsurer is indemnified.

47

An agreement under which one insurer or reinsurer is substituted for another. All responsibilities are handled by the new insurer.

Novation

48

An agreement that defines the terms of the facultative reinsurance coverage on a specific loss exposure.

Facultative certificate of reinsurance

49

What are the 4 functions of facultative reinsurance?

-large-line capacity for exposures exceeding treaty reinsurance agreements
-reduce exposure in certain geographic area
-insure loss exposure with atypical hazard characteristics while maintaining favorable loss experience of the primary insurer's treaty reinsurance and associated profit-sharing.
-insure particular classes of loss exposures that are excluded from treaty reinsurance.

50

Why is maintaining favorable treaty loss experience important?

The reinsurer ha underwritten and priced the treaty with certain expectations. Treaty could be terminate or price could be increased.

51

Facultative insurance is usually priced to reflect the likelihood of _______ ____________.

Adverse selection

52

Why is the expense of placing facultative reinsurance so high?

The primary insurer has to provide extensive information about each loss exposure.

A significant amount of time is spent on each cession. Underwriter also has to notify the reinsurer of any endorsement, loss notice, or cancellation.

53

What are the two hybrids of treaty and facultative reinsurance?

Facultative treaty: agree an how subsequent facultative submissions will be handled. Used when there aren't enough exposures for treaty.

Facultative obligatory treaty: primary insurer has option of ceding loss exposures. The reinsurer has to accept all exposures.

54

A ceding commission that is a fixed percentage of the ceded premiums.

Flat commission

55

A ceding commission that is contingent on the reinsurer realizing a predetermined percentage of excess profit on ceded loss exposures.

Profit-sharing commission

56

A ceding commission based on a formula that adjusts the commission according to the profitability of the reinsurance agreement.

Sliding scale commission.

57

A type of pro rata reinsurance in which the primary insurer and the reinsurer share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) using a fixed percentage.

Quota share reinsurance

58

What is the distinguishing characteristic of quota share reinsurance?

It uses a fixed percentage in sharing amounts of insurance, policy premiums, and losses.

59

A treaty in which the primary insurer retains 45% would be called a ___% quota hate treaty.

55%

60

Most reinsurance agreements specify a _____ _______ limit and some include a ___ ___________ limit.

Maximum dollar / per occurrence

61

A type of excess of loss reinsurance that protects the primary insurer from an accumulation of retained losses that arise from a single catastrophic event.

Catastrophe excess of loss reinsurance

62

What is one of the downfalls of quota share reinsurance?

Policies with good risks and low amounts of insurance that would normally be retained have to be reinsured.

63

Why aren't insurers subject to adverse selection with quota share reinsurance?

The primary insurer and reinsurer share liability for every loss exposure subject to the quota share treaty.

64

A type of quota share treaty that allows a primary insurer to retain a larger proportion of the small loss exposures within its financial capacity, while maintaining a safer and smaller retention on larger loss exposures.

Variable quote share treaty

65

A type of pro rata reinsurance in which the policies covered are those whose amount of insurance exceeds a stipulated dollar amount, or line. Usually only used with property insurance.

Surplus share reinsurance

66

What is the distinguishing feature of surplus share reinsurance?

When an underlying policy's total amount of insurance exceeds a stipulated dollar amount, or line, the reinsurer assumes the surplus share of the amount of insurance.

67

Provide a simple explanation and example of surplus share reinsurance.

The reinsurer covers the difference between the written limit and the amount the primary insurer wants to retain. In return, the primary insurer pays the reinsurer the proportion of premium that corresponds to the proportion of coverage reinsured.

Ex. $1MM home. Primary insurer wants to cede $750k, Annual premium of $2,000. Primary insurer keeps $500 and reinsurer gets $1500.

68

How is a reinsurance limit set in a surplus share reinsurance contract?

The reinsurance limit is expressed in multiples of the primary insurer's line. Ex. a nine-line surplus treat insures loss exposures that exceed its retention by a multiple of nine.

Ex. $300,000 line for a nine-line treaty. Primary insurer has retains $300,000 and reinsurer covers from $300,000 to $2.7 million ($300k x9)

69

Why are surplus share treaties more costly go administer than quota share treaties?

The percentage of policy premiums and losses vary for each loss exposures ceded. Insurer has to reporter to reinsurer (bordereau)

70

A report the primary insurer provides periodically to the reinsurer that contains a history of all loss exposures reinsured under the treaty.

Bordereau

71

A document that provides the minimum and maximum line a primary insurer can retain on a loss exposure.

Line guide

72

A type of reinsurance in which the primary insurer is indemnified for losses that exceed a specified dollar amount.

Excess of loss reinsurance (nonproportional reinsurance)

73

The dollar amount above which the reinsurer responds to losses.

Attachment point

74

Excess of loss premiums are negotiated based on the likelihood that losses will exceed the ______ ______. It is not proportional unlike quota share and surplus share.

Attachment point

75

The premium the primary insurer charges on its underlying policies and to which a rate is applied to determine the reinsurance premium.

Subject premium

76

An excess of loss reinsurance agreement with a low attachment point.

Working cover

77

When is a working cover typically used?

When an insurer expects an unprofitable year but expects good years to offset bad ones.

When selling a new type of insurance they have little experience with.

78

A provision in a reinsurance agreement that requires the primary insurer to retain a specified percentage of the losses that exceed its attachment point.

Co-participation provision

79

What is the purpose of a co-participation provision on an excess of loss reinsurance treaty?

Provide the primary insurer with a financial incentive to efficiently manage losses that exceed the attachment point.

80

What are the two most common ways of handling loss adjustment expenses in an excess of loss reinsurance treaty?

-prorate LAE between reinsurer and primary insurer based on same percentage share each is responsible for the loss. ("Pro rata in addition")

-add LAE to the amount of loss when applying the attachment point of the excess of loss reinsurance agreement. ("LAE included in the limit"). This is usually how liability insurance with high litigation costs works.

81

What are the five types of excess of loss reinsurance?

1) per risk
2) catastrophe
3) per policy
4) per occurrence
5) aggregate

82

A type of excess of loss reinsurance that covers property insurance and that applies separately to each loss occurring to each risk.

Per risk excess of loss reinsurance

83

True or false, per occurrence limits are commonly include with per risk excess of loss reinsurance agreements?

True

84

Why is catastrophe excess of loss reinsurance usually purchased with per risk?

If there is a catastrophe, numerous risks could be total losses and there is limit what the reinsurer pays on each risk.

85

Excess of loss reinsurance which protects the primary insurer from an accumulation of retained losses that arise from a single catastrophic event. O

Catastrophe excess of loss.

86

How are the attachment points stated with catastrophe excess of loss?

Dollar amounts of loss.

87

A reinsurance agreement clause that defines the scope of a catastrophic occurrence for the purposes of the agreement. The scope is usually a time period.

Loss occurrence clause

88

What happens to policy limits after a reinsurer pays the primary insurer for catastrophe losses?

Coverage limits for future losses is reduced unless the primary insurer pays additional premium to reinstate the coverage.

89

A type of excess of loss reinsurance that applies the attachment point and the reinsurance limit separately to each insurance policy issued by the primary insurer regardless of the number of losses occurring under each policy.

Per policy excess of loss reinsurance

90

A type of excess of loss reinsurance that applies the attachment point and reinsurance limit to the total losses arising from a single event affecting one or more of the primary insurer's policies.

Per occurrence excess reinsurance

91

Which line of business are per policy and per occurrence excess of loss reinsurance usually used with?

Liability Insurance.

92

Explain how per occurrence excess of loss woks.

Covers an occurrence. If the total of losses exceed the retention, reinsurance is attached.

93

A type of per occurrence excess of loss reinsurance for liability loss exposures that protects the primary insurer against aggregations of losses from one occurrence that affects several insureds or several types of insurance.

Clash cover

94

Explain how a clash cover works

If a loss occurs that results in loss to multiple exposures, the normal retention for an occurrence first applies, then the reinsurer covers the remainder up to their limit. After the limit is exhausted, the primary insurer retains loss up to the retention set for the clash cover. Then the reinsurer takes over up to their limit.

95

What is a clash cover useful for?

Types of liability insurance in which loss adjustment expenses are likely to be high and underlying per occurrence reinsurance limits include these exposures rather than prorate them. (professional liability, medical malpractice, d&o). Also good for extracontractual damages

96

Damages awarded to the insured as a result of the insurer's improperly handling a claim.

Extracontractual damages.

97

A loss that results when an insured sues an insurer for failing to settle a claim within the insured's policy limits when the insurer had the opportunity to do so.

Excess of policy limits loss

98

Type of excess of loss reinsurance that covers aggregated losses (over a specified period) that exceed the attachment point, stated as a dollar amount of loss or as a loss ratio, and that occur over a specified period, usually one year.(used for property and liability)

Aggregate excess of loss reinsurance

99

How is the attachment point of a Aggregate excess of loss reinsurance treaty set?

As either a dollar amount of loss or as a loss ratio.There is also usually a 5-10% co-participation provision.

100

Aggregate excess of loss reinsurance with an loss ratio attachment point. If a primary insurer retains 90%, the reinsurer may retain 91%-120% (30% xs 90$). The primary insurer is responsible for losses above 120%

stop loss reinsurance

101

A nontraditional type of reinsurance in which the reinsurer's liability is limited and anticipated investment income is expressly acknowledged as an underwriting component. It is used to cover exposures that were tradition

Finite risk reinsurance (financial reinsurance)

102

What is a typical policy term for finite risk reinsurance?

3-5 years

103

Finmite risk reinsurance premiums can be a _______ percentage of the reinsurance limit.

substantial

104

Generally, finite risk reinsurance is designed to cover ___-severity losses.

High

105

A financial market in which long-term securities are traded.

Capital market

106

The use of securities or financial instruments (for example, stocks, bonds, commodities, financial futures) to finance an insurer's exposure to catastrophic loss.

Securitization of risk

107

A facility established for the purpose of purchasing income-producing assets from an organization, holding title to them, and then using those assets to collateralize securities that will be sold to investors.

Special purpose vehicle (SPV)

108

Financial contract whose value is based on the level of insurable losses that occur during a specific time period.

Insurance derivative

109

An agreement, entered into before any losses occur, that enables an organization to raise cash by selling stock or issuing debt at prearranged terms after a loss occurs that exceeds a certain threshold.

Contingent capital arrangement

110

A financial instrument whose value is primarily driven by insurance and/or reinsurance loss events.

Insurance-linked security

111

A type of insurance-linked security that is specifically designed to transfer insurable catastropher risk to investors.

Catastrophe bond.

112

A means through which a primary insurer can exchange a portion of its insurance risk for another insurer's

catastrophe risk exchange

113

A surplus note that has been designed so a primary insurer, at its option, can immediately obtain funds by issuing notes at a pre-agreed rate of interest. They increase primary insurer's assets without increasing liabilities.

contingent surplus note

114

A type of unsecured debt instrument, issued only by insurers, that has characteristics of both conventional equity and debt securities and is classified as policyholders' surplus rather than as a liability on the insurer's statutory balance sheet.

Surplus note

115

The price at which the stock or commodity underlying a call option (such as a warrant) or a put option can be purchased (called) or sold (put) during a specified period.

Strike price

116

An insurance-linked security that covers the primary insurer in the event that an industry-wide loss from a particular catastrophic event (earthquake) exceeds a predetermined threshold. Coverage is triggered by industry losses as a whole.

Industry Loss Warranty (ILW)

117

Agreement that gives the primary insurer the right to a cash payment from investors if a specified index of catastrophe losses reaches a specified level (strike price) catastrophe loss index keeps track of losses.

Catastrophe option

118

An arrangement in which a bank or other financial institution agrees to provide a loan to primary insurer in the event the primary insurer suffers a loss. (Like prequalifying). They have to pay a commitment fee

Line of credit

119

Limited-existence SPV that is often an independent company that provides a primary insurer additional capacity to write property catastrophe business or other short-rail lines through a quota share agreement with private investors. Investors assume portion of risk and earn corresponding profit on primary insurer's book or business.

Sidecar

120

The combination of reinsurance agreements that primary insurer purchases to meet its reinsurance needs.

Reinsurance Program

121

Factors Affecting Reinsurance Needs

1. Growth plans
2. Types of insurance sold
3. Geographic spread of loss exposures
4. Insurer size
5. Insurer structure
6. Insurer financial strength
7. Senior management's risk tolerance

122

Why do insurers planning to grow need reinsurance?

-growth drains surplus. Ceding commission replenishes.

-loss ratio of new business is less stable, especially if selling a new, unfamiliar type of insurance or in new markets.

-growth involves entering markets with greater coverage requirements. (Entering high net worth homeowners/umbrella)

123

Which type of reinsurance is best for growing insurers

Pro rata

124

Why do the types of insurance insurers sell dictate the need for reinsurance?

Commercial loss exposures deal with higher limits and risks are not homogeneous or stable. States require more surplus or lines such as medical malpractice. Carriers that sell more types of insurance are usually more stable and require less reinsurance.

125

A measure of the loss volatility of the types of insurance sold by an insurer.

Underwriting Risk

126

How does geographic area dictate reinsurance.

Insurers that are not diversified geographically need more reinsurance. Diversified insurers are less prone to catastrophe and insurance regulations and laws in certain territories.

127

Stronger insurers need _____ reinsurance.

Less. They don't need surplus relief and don't need as much reinsurance to stabilize their loss ratio.

128

Why does a financially strong insurer need less reinsurance?

1) doesn't need unplugs relief to increase capacity
2) need less reinsurance to stabilize loss ratio

129

What are the factors in selecting a retention?

-maximum primary insurer can retain
-maximum primary insurer wants to retain
-minimum retention sought by the insurer
-co-participation provision

130

The maximum amount an insurer can retain depends on ___________ _________ and the primary insured's _________ ________.

Regulatory requirements (3-1)/10% 1 exposure / financial strength

131

What are the factors that affect reinsurance limit selection?

-max policy limit
-extra contractual obligations m-loss adjustment expenses
-clash cover
-catastrophe exposure.

132

Are alien reinsurers regulated in the USA?

No

133

What is the "nine-month-rule?"

It requires that reinsurance contracts be finalized, reduced to written form, and signed within nine months of the policy period's commencement.

134

Having documentation of all agreed terms of an insurance policy or reinsurance contract by the date of inception and issuing and delivering such policy or contract within thirty business days of inception of coverage.

Contract certainty

135

What do some primary insurers have to do before they can obtain a reserve credit due to reinsurance?

They have to show state regulators that the contract has desirable clauses.

136

A clause that is required in reinsurance agreements indicating that the primary insurer's bankruptcy does not affect the reinsurer's liability for losses under the reinsurance agreement.

Insolvency clause

137

A clause that is required in reinsurance agreements indicating that the reinsurance intermediary is the reinsurer's agent for collecting reinsurance premiums and paying reinsurance claims. (the reinsurer assumes the credit risk that the intermediary will be unable or unwilling to pay all of the premiums collected)

Intermediary clause

138

Why is an intermediary clause beneficial to primary insurers?

In most cases, courts have held that the intermediary is the primary insurer's agent. If this clause wasn't attached, the risk of the reinsurance intermediary's insolvency would most often fall on the primary insurer instead of the reinsurer.

139

What is the difference between treaty reinsurance and facultative reinsurance?

Treaty: Reinsurer agrees in advance to reinsure all the loss exposures that fall within the treaty. Most reinsurers require all exposures in the terms of the treaty be reinsured.

Facultative: Primary insurer negotiates a separate agreement for each exposure.

140

Why do primary insurers make treaty reinsurance agreements?

So underwriters do not have to exercise discretion in using reinsurance. It also protects reinsurance companies because if each risk were chosen for reinsurance there would be adverse selection.

141

How are reinsurers regulated?

Reinsurers are required to file financial agreements with state regulatory authorities and to adhere to state insurance regulations regarding reserves, investments, and minimum capital and surplus requirements. They must also undergo periodic examination by the appropriate state authorities.

142

Describe the relationship between primary insurer rates and reinsurer rates?

The regulation of primary insurer rates could indirectly affect reinsurance rates to the extent that the reinsurers receive a reinsurance premium based on the premiums of primary insurers. Thus regulating the primary insurer's rates might place an effective ceiling on the amount of the primary insurer can pay for reinsurance.

143

Which one of the following statements is true with regard to excess of loss reinsurance?


A. Per policy excess of loss applies primarily to property insurance, and per risk excess of loss applies primarily to liability insurance.

B. Per policy excess of loss applies to both property and liability insurance.

C. Per policy excess of loss applies primarily to liability insurance, and per risk excess of loss applies primarily to property insurance.

D. Per risk excess of loss always applies to both property and liability insurance.

C. Per policy excess of loss applies primarily to liability insurance, and per risk excess of loss applies primarily to property insurance

144

A key characteristic that distinguishes finite risk reinsurance from other types of reinsurance is that finite risk reinsurance

A. Places a finite limit on each occurrence.

B. Includes a profit-sharing commission in addition to a flat ceding commission.

C. Applies above a finite dollar amount or line.

D. Transfers a limited amount of risk to the reinsurer.

D. A key characteristic that distinguishes finite risk reinsurance from other types of reinsurance is that finite risk reinsurance transfers a limited amount of risk to the reinsurer.

145

Which one of the following is true regarding sidecar arrangements as an alternative to traditional and non-traditional reinsurance?

A. Sidecars are a means through which a primary insurer can exchange a portion of its insurance risk for another insurer's insurance risk.

B. Under these arrangements, the primary insurer charges a ceding commission and may receive a profit commission if the book of business is profitable.

C. Sidecars have a strike price at which the primary insurer will be able to receive cash from its investors to enable it to pay losses from a catastrophe.
Incorrect

D. Under a sidecar arrangement, investors receive their return for the risk assumed through periodic interest payments on the principal amount assumed.

B. Under these arrangements, the primary insurer charges a ceding commission and may receive a profit commission if the book of business is profitable.

146

Clash coverage limits should be set by considering all of the following, EXCEPT:


A. Potential for multiple primary policies to be involved in a single occurrence

B. Catastrophe excess of loss reinsurance purchased by the primary insurer

C. Potential for excess of policy limits losses

D. Policy limits offered by the primary insurer

B. Catastrophe excess of loss reinsurance purchased by the primary insurer
Correct

147

Clash coverage limits should be set by considering all of the following, EXCEPT:

A. Potential for multiple primary policies to be involved in a single occurrence

B. Catastrophe excess of loss reinsurance purchased by the primary insurer

C. Potential for excess of policy limits losses
Incorrect

D. Policy limits offered by the primary insurer
Incorrect

B. Catastrophe excess of loss reinsurance purchased by the primary insurer

148

Which one of the following statements is true regarding reinsurance regulation?

A. Reinsurers must comply with state regulations only with regard to their investments.

B. Reinsurance rates are regulated in the same manner as insurance rates.

C. Reinsurers must file reinsurance contract wording with state regulators..

D. Reinsurers are subject to periodic examinations by state authorities.

D. Reinsurers are subject to periodic examinations by state authorities.

149

Which one of the following would be most likely to be a factor affecting the selection of a retention by a primary insurer in its reinsurance program?

A. Extra-contractual obligations

B. Clash cover

C. Catastrophe exposure

D. Co-participation provision

D. Co-participation provision

150

The losses listed below arose from three policies and one occurrence:

1 $300,000
2 $600,000
3 $800,000

Given the above losses, what is the difference between the amount of loss a primary insurer would recover under a $750,000 xs $250,000 per policy excess of loss reinsurance treaty versus a $1,000,000 xs $1,000,000 per occurrence excess of loss reinsurance treaty?


A. $0
B. $50,000
C. $250,000
D. $700,000
Incorrect

C. Under a $750,000 excess of $250,000 per policy excess of loss reinsurance treaty, the primary insurer would recover the amount in excess of $250,000 on each loss, for a total of $950,000. Under the per occurrence excess of loss reinsurance treaty, the primary insurance would recover $700,000, or the total of all 3 losses of $1,700,000 less the $1,000,000 retention. The difference between them is $250,000.

151

Jones Insurer writes only commercial property policies for businesses in Florida. Jones has a large premium base and excellent overall experience. Jones would have all of the following, EXCEPT:

A. Extra contractual obligations exposure
B. Excess of policy limits exposure
C. Clash exposure
D. Catastrophe exposure

C. Clash exposure

152

Which one of the following correctly describes a capital market instruments used by insurers to finance risk?

Choose one answer.

A. An industry loss warranty is an insurance-linked security that covers the primary insurer in the event that the industry-wide loss from a particular catastrophe exceeds a predetermined threshold.

B. Finite risk reinsurance is a type of reinsurance in which the reinsurer's liability is limited and anticipated investment income is expressly acknowledged as an underwriting component.

C. Under a catastrophe risk exchange, a bond is issued with the condition that if the issuer suffers a catastrophe greater than a specified amount, the obligation to pay interest and/or repay principle is deferred or forgiven.

D. A catastrophe risk exchange is an agreement that gives the primary insurer the right to a cash payment from investors if a specified index of catastrophe losses by geographic area reaches a specified level.

A. An industry loss warranty is an insurance-linked security that covers the primary insurer in the event that the industry-wide loss from a particular catastrophe exceeds a predetermined threshold.