Chapter 3 - Reinsurance

Question 1

What is reinsurance?

Answer 1

when insurers want to transfer some of their own risk to other insurers

Question 2

Why do insurers buy reinsurance?

Answer 2

• risk transfer
• increase capacity
• balance out peaks and troughs
• peace of mind

Question 3

Why sell reinsurance?

Answer 3

• access business not otherwise accessible
• become involved in a class of business on a trial basis
• pure business preference

Question 4

What percentage of Lloyd’s premium income in 2019 was reinsurance?

Answer 4

32%

Question 5

What is full follow clause?

Answer 5

• insurer does not have to inform reinsurer about claim, just presents them a bill
• unpopular with reinsurers
• if any suggestion of in-proper action reinsurer has right to ask questions

Question 6

What is claims co-operation clause?

Answer 6

• insurer informs reinsurer of claims and during handling process
• reinsurer does not necessarily have right to interfere with claims handling strategy

Question 7

What is claims control clause?

Answer 7

• reinsurers preference
• reinsurer has full decision making authority
• failure to comply by original insurer could result in delay of reinsurance recovery or ability to recover at all

Question 8

Define to cede

Answer 8

act of sharing risk with reinsurers

Question 9

Define cedant

Answer 9

original insurer passing risk

Question 10

Define cession

Answer 10

share of the risk passed to reinsurers

Question 11

Define collecting note

Answer 11

document presented to reinsurer for claim under excess of loss reinsurance

Question 12

Define facultative reinsurance

Answer 12

reinsurance for an individual risk

Question 13

Define non-proportional reinsurance

Answer 13

Premium and claims do not have a direct correlation, premium set more in line with direct insurance and claims dealt with on a financial basis

e.g excess of loss, stop loss

Question 14

Define proportional reinsurance

Answer 14

Premium and claims shared in pre-agreed proportions

e.g quota share, surplus treaty

Question 15

Define retrocedant

Answer 15

reinsurer obtaining reinsurance for itself

Question 16

Define retrocession

Answer 16

Cession where entity ceding is a reinsurer

Question 17

Define retrocessionaire

Answer 17

Reinsurer accepting reinsurance from an entity that is a reinsurer

Question 18

Define treaty reinsurance

Answer 18

reinsurance for a wide book of risks, e.g a whole class of business or an insurer’s whole portfolio

Question 19

Why would an insurer buy facultative reinsurance?

Answer 19

• written a larger line on something that it wanted to

- risk is unconventional and falls outside of what is covered in their treaties

Question 20

Why do insurers have to think carefully about reinsurance?

Answer 20

• generally more expensive
• if too expensive, risk loses money before any claims
• should be treated like direct insurance

Question 21

What is facultative obligatory insurance?

Answer 21

insurer has an agreement with reinsurer that if writing a risk within criteria the insurer has a choice to cede, if decides to reinsurer has to accept

Question 22

How is the premium for non-proportional reinsurance show?

Answer 22

adjustable based on cedant’s overall gross premium income with a minimum

Question 23

What is the danger of excess of loss reinsurance?

Answer 23

insurer could “burn through” the cover - reinsurers may reinstate a number of times throughout policy period, usually for a fee

Question 24

When can claims be grouped for presentation to the reinsurer?

Answer 24

When they arise out of one event

Question 25

Why would insurers want to group claims?

Answer 25

Insurer only has to pay first layer once

Question 26

What happens if a claim is presented that would breach the first life of an excess of loss policy?

Answer 26

Premium is payable to the reinsurer to activate the second life

Question 27

What is a combined ratio and when is the insurer profitable?

Answer 27

claims + operating costs / premium if less than 100% then profitable

Question 28

What is stop loss reinsurance?

Answer 28

Triggered when an insurers combined ratio exceeds a specific point (e.g 103%), and covers losses until combined ratio hits another point (e.g 130%)

Question 29

Describe quota share treaty

Answer 29

Insurer and reinsurer share premium and claims proportionally - say 70/30 - reinsurer sees every risk that falls into the criteria

Question 30

Describe surplus line treaties

Answer 30

Lines of reinsurance which are the same size as the maximum line allowed to write E.g if max line is 5m and want to write a 15m risk, need two surplus lines to cover

Question 31

How is a reinsurance programme constructed?

Answer 31

1. consider if any individual risks do not fit into proportional / non-proportional contracts and buy fac for these 2. insurer thinks about individual classes of business and reinsurance for all risks that fall into those classes, proportional considered first then non-proportional 3. insurer could think about XL protection for specific classes 4. XL protection for whole account 5. catastrophe XL protection for whole account