Ch 9 Fundamentals of Life Reinsurance

Question 1

transfer of risk concept

Answer 1

1. death benefit offsets any financial loss incurred by bene due to death of insured
2. payments made to policy help stabilize the financial obligations of policy owner

Question 2

reinsurance

Answer 2

transfer of part of the hazards or risks that a direct insurer assumes by way of insurance contract or legal provision on behalf of an insured to a second insurance carrier, the reinsurer, who has no direct contractual relationship w/ the insured

Question 3

purpose of reinsurance

Answer 3

-minimize adverse financial impact of claims on direct insurer, protection against loss

Question 4

indemnity arrangements

Answer 4

1. no contractual relationship between insured and reinsurer
2. direct carrier always responsible for financial obligation
3. reinsurance arrangement separate from contract
4. reinsurer obligation to pay determined by terms of reinsurance cession and reinsurance treaty
5. direct carrier always obligated to pay legitimate claim

Question 5

ceded risk

Answer 5

risk transferred to reinsurer by a direct writing company or to a retrocessionaire by a reinsurer

Question 6

assumed risk

Answer 6

acceptance of a cession by a reinsurer or a retrocession by a retrocessionaire

Question 7

ceding company

Answer 7

company that transfers the risk to a reinsurer

Question 8

cession

Answer 8

document or electronic transmittal that describes risk transferred

Question 9

reinsurance treaty

Answer 9

written contract defining the reinsurance agreement. defines relationship between ceding company and the reinsurer including specific risk definition, data on limits and retention and provisions for premium payment and duration

Question 10

retention limit

Answer 10

specified max amount of insurance that a life insurer is willing to carry at its own risk on any one life w/o transferring some of the risk to another insurance company

Question 11

retrocessionaire

Answer 11

reinsurer that contractually accepts from another reinsurer a portion of the ceding company’s underlying reinsurance risk

Question 12

retrocession

Answer 12

risk ceded by a reinsurer

Question 13

Benefits of Reinsurance

Answer 13

1. Capacity
2. Prevention of catastrophic loss
3. Market Entrance
4. Market Withdrawal
5. Reinsurance Services

Question 14

Capacity

Answer 14

allows direct carriers to write larger amounts than normally possible
-limits varied by: selected criteria such as age, UW classifications, plan type

Question 15

reinsurance pool

Answer 15

method of allocating reinsurance among several reinsurers. Each receives specified percentage of each risk ceded to pool.

Question 16

Market entrance

Answer 16

1. direct writing company may not have necessary expertise. benefit from reinsurer experience
2. mortality block may not be as expected until large # of policies issue
3. each claim has higher financial impact when only a few policies are in force

Question 17

law of large numbers

Answer 17

the greater the number of occurrences that take place (a) the more accurate the prediction of future results (b) the less the deviation of the actual losses from the expected losses (c) the more reliable the prediction will be

Question 18

assumption reinsurance

Answer 18

agreement which one company permanently transfers full responsibility for a block of policies to another company

Question 19

reserves

Answer 19

liabilities for amounts an insurance company is obligated to pay in accordance w/ an insurance policy or annuity contract

Question 20

financial reinsurance

Answer 20

primarily to achieve financial goals, provides temporary infusion of capital from reinsurer to fulfill reserve requirements, also covers non-mortality risks of:
-policy persistency
-interest
-cash values
-reserve requirements
-secondary guarantees
-return of premium

Question 21

Types of Risk Transfer

Answer 21

MRT - excess of retention
YRT - quota share
Coinsurance - quota share

Question 22

YRT - yearly renewable term - excess of retention

Answer 22

the risks, but not the permanent plan reserves, are transferred to the reinsurer for a premium that varies each year w/ the amount at risk and the ages of the insured
-premiums paid based on age, gender, duration of contract
-retain amounts up to retention limit

Question 23

YRT - yearly renewable term - quota share

Answer 23

premiums and losses are shared proportionately between ceding company and reinsurer
-allows for use before retention is exhausted
-retain fixed % of risk, cede remaining

Question 24

first dollar reinsurance

Answer 24

retain fixed percentage of every dollar of insurance coverage issued and cede the balance to reinsurer
- once retention reached, addl coverage can be auto ceded w/in constraints of autobind and jumbo limits if treaty stipulates

Question 25

coinsurance - quota share

Answer 25

assuming company receives a proportionate share of all risks and cash flows of policy -reinsurer must set up admin services that mirror and integrate w/ ceding company -useful if ceding company is small and needs large amt of support

Question 26

Facultative Reinsurance

Answer 26

risk is offered by a direct writer to a reinsurer for UW approval -used when total death benefit in force and applied for might exceed limit of reinsurer's UW capacity as defined in treaty -also used when direct carrier seeking alternative UW eval or does not wish to retain risk used when: 1. case does not qualify for auto 2. cannot place offer & seeks another offer 3. does not want to keep normal retention

Question 27

facultative shopping

Answer 27

act of submitting an underwriting case to several reinsurers in order to obtain most competitive offer -auto not available on that life for at least several years after fac consideration

Question 28

Automatic Reinsurance

Answer 28

ceding company is obligated to cede, and the reinsurer is obligated to assume, risks that meet specific criteria based on provisions of the treaty & ceding company's UW guidelines

Question 29

excess of retention

Answer 29

ceding company establishes a dollar amount retention limit and reinsurer agrees to assume amounts over this limit, up to reinsurer's automatic binding limit

Question 30

binding

Answer 30

act of securing auto reinsurance

Question 31

automatic binding limit

Answer 31

dollar amount of risk on a single or joint life to which a reinsurer is willing to obligate itself w/o making its own UW assessment

Question 32

legal clauses for auto

Answer 32

1. ceding company will keep regular published retention or hold its full retention on life under previously issued in force policies 2. ceding company will apply its normal UW guidelines 3. total of new and amt already reinsured will not exceed auto binding limit 4. amt of INSIF w/ all companies, including amt to be replaced, plus amt currently applied for will not exceed jumbo limit 5. app must be on life that has not been submitted fac w/in # yrs agreed upon by ceding company and reinsurer.

Question 33

Jumbo Limit

Answer 33

limit placed on amt of coverage that can be inforce and applied for on individual life for auto reinsurance purposes. If exceeds limit, must be fac 1. amt IF and applied for w/ all companies on individual 2. amt IF and to be placed w/ all companies 3. amt IF and applied for w/ all companies but excluding controlled replacements

Question 34

automatic pool

Answer 34

multiple reinsurers part of arrangement ceded cases based on percentage share of pool

Question 35

alphabetical split

Answer 35

allocating auto among several reinsurers using first letter of insured's last name

Question 36

Facultative Obligatory Reinsurance

Answer 36

hybrid between fac and auto. Risk to be ceded submitted to reinsurer -submit limited info about risk to reinsurer instead of full UW file -limited right to decline

Question 37

catastrophe reinsurance

Answer 37

provides coverage for losses resulting from an accident or natural disaster involving more than one insured. Losses typically must exceed specified amount & # of insureds and/or locations -does not cover deaths due to war or natural causes -covers block of business, not individual

Question 38

reinsurance treaty

Answer 38

agreement that details the obligations and responsibilities of the direct carrier and reinsurer

Question 39

provisions of reinsurance treaty

Answer 39

1. parties to agreement 2. automatic reinsurance: conditions employed, how ceding company manages retention 3. facultative reinsurance: conditions employed, clauses 4. commencement of liability 5. reinsured risk amount 6. reductions, terminations, changes 7. conversions, exchanges, replacements 8. errors and omissions 9. dispute resolution 10. arbitration 11. forms, manuals and issue rules

Question 40

parties to agreement

Answer 40

defines who is participant, insured is not included

Question 41

commencement of liability

Answer 41

addresses reinsurer's liability for a claim and at which point that liability begins auto: same time as ceding company fac: same time as ceding company, provided valid offer was made and accepted

Question 42

reinsured risk amount

Answer 42

covered by treaty and defines addl policy benefits reinsurer is responsible for outside basic death benefits

Question 43

reductions, terminations, changes

Answer 43

policy increases, risk class changes and reinstatements underwritten in accordance w/ customary standards and procedures employed by ceding company. exception is fac reinsured, changes go to reinsurer

Question 44

conversions, exchanges, replacements

Answer 44

auto business will be underwritten by ceding company

Question 45

claims

Answer 45

1. copies of proofs shared w/ reinsurer 2. contestable claims require reinsurer to submit notification to support participation in action by ceding company 3. misrepresentation or suicide, reinsurer will refund net reinsurance premiums to ceding company 4. extra contractual damages reinsurer will not participate in punitive or compensatory damages but will participate in statutory penalties

Question 46

errors and omissions

Answer 46

if unintentional and non-repetitive and not result of negligence or deliberate act. correct promptly if can be corrected

Question 47

dispute resolution

Answer 47

procedure for disagreements that cannot be settled, negotiation required in good faith and complete disclosure

Question 48

arbitration

Answer 48

binding arbitration, base decision on terms and conditions of treaty and on customs and practices of life and reinsurance industries, decision is final, no appeal

Question 49

forms, manuals, issue rules

Answer 49

copies of UW procedures, forms, guidelines and UW manuals and info about special UW programs. must have thorough knowledge of products and plans being underwritten

Question 50

Key factors of reinsurance pricing

Answer 50

1. product: analysis of product and assumptions 2. market: nature of market influences and risk 3. distribution system 4. underwriting: must have confidence and knowledge of UW dept, review of manuals, procedures, personnel, training, experience, reinsurers manuals, guidelines, training programs, results of audits and compliance w/ internal procedures

Question 51

reinsurance underwriting audits

Answer 51

significant value on ceding company's internal audit results and reinsurer's audit of ceding company files -ensure compliance w/ treaty areas of review 1. treatment of conditional receipt 2. compliance w/ required forms/notices 3. adherence to published UW rules/procedures 4. acquisition of age/amount & appropriate addl UW requirements 5. file documentation and use of case referrals 6. timeliness 7. clarity of communication w/ field 8. eligibility of case for auto reinsurance and adherence to retention, jumbo and autobind limits 9. final assessment to include use of exceptions, concessions and business exceptions

Question 52

reinsurance marketplace

Answer 52

recurring business has dropped due to: -mergers/acquisitions -companies leaving market -new entrants -consolidation of reinsurance capacity has leveled off -increasing pressures by shareholders for higher profits and greater return on investment -direct carriers increasing internal retention limits concerns for industry -providing excess capacity at unsustainable price -development & retention of knowledgeable staff -consistent and profitable risk management -resistance to revised treaty language, data reporting and treatment of errors and exceptions -adverse impact of STOLI