Chapter 3 - Reinsurance

Question 1

Why do insurers buy reinsurance?

Answer 1

1. Risk transfer
2. Peace of mind
3. Balancing out peaks + troughs - some classes of business are profitable 1 year, but has large losses the next, etc
4. Releasing capacity - insurer has greater capacity if you transfer risk to reinsurers

Question 2

Why do firms sell reinsurance?

Answer 2

1. Accessing business not otherwise available - regulators in a country may only agree to license reinsurance
2. To become involved in class of business on a trial basis - trialing a new class w/ reinsurance is safer than writing it directly
3. Pure business preference

Question 3

Why might regulators in a country only agree to licensure an organisation to write reinsurance business?

Answer 3

They don’t want premium leaving the country

Question 4

What is retention/retained line?

Answer 4

The amount of the original risk that the insurer is retaining

Question 5

What are the 2 main types of reinsurance?

Answer 5

1. Facultative reinsurance - covers 1 single risk
2. Treaty reinsurance - covers wider portfolio of risks

Question 6

What is facultative reinsurance?

Answer 6

Covers 1 single risk - normally used for unusual risks

Question 7

What is treaty reinsurance?

Answer 7

Covers a wider portfolio of risks

Question 8

What is the disadvantage of facultative reinsurance?

Answer 8

Admin is more time-consuming, so, it can be more expensive

Question 9

How is reinsurance + claims structured for facultative reinsurance?

Answer 9

•Insurer pays premium to reinsurer at beginning of the contract + claims are presented to reinsurer when they occur

•For claims, only insurer + reinsurer is involved

Question 10

What is facultative obligatory reinsurance?

Answer 10

Facultative reinsurer takes a single risk in multiple forms

•For all risks the insurer writes which fall into a set criteria, the insurer can choose to reinsurer them all - it’s an agreement between insurer + reinsurer

Question 11

What are the 2 main types of treaty reinsurance?

Answer 11

1. Proportional reinsurance - reinsurer takes a set amount of a claim + they’ll get a share of the premium
2. Non-proportional reinsurance - reinsurer takes any claim above a set amount, but it isn’t linked to the premium

Question 12

What is proportional reinsurance as a type of treaty reinsurance?

Answer 12

Reinsurer takes a set amount of a claim + they’ll get a share of the premium

Question 13

What is non-proportional reinsurance as a type of treaty reinsurance?

Answer 13

Reinsurer takes any claim above a set amount, but it isn’t linked to the premium

Question 14

What are the 2 types of proportional reinsurance as a type of treaty reinsurance?

Answer 14

1. Quota share reinsurance - reinsurer + insurer splits every claim + splits premium accordingly
2. Surplus lines reinsurance - insurer will keep a line, but reinsurer will take the above lines

Question 15

What is quote share reinsurance as a type of proportional, treaty, reinsurance?

Answer 15

•Reinsurer + insurer splits every claim + splits premium accordingly

•So, each risk is shared w/ reinsurer in an agreed percentage

Question 16

What is the benefit + disadvantage of quote share reinsurance as a type of proportional, treaty, reinsurance?

Answer 16

Useful for insurers when new in line of business + not sure what will come in, but this could mean you’re spending more money

Question 17

What is surplus lines reinsurance as a type of proportional, treaty, reinsurance?

Answer 17

Insurer will keep a line, but reinsurer will take the above lines

•E.g. insurer takes claims up to 100k + reinsurer takes up to 500k - if claim is 1m, insurer takes 1st 100k, reinsurer takes it to 600k, but left over 400k comes back to insurer

Question 18

What is the benefit of surplus lines reinsurance as a type of proportional, treaty, reinsurance?

Answer 18

•Insurer can increase its capacity as they know its coveted

•Every UW has max retained line, so if it’s a good risk then a larger than permitted share might be good business, so would get reinsurance to cover themselves

Question 19

What are the 2 types of non-proportional reinsurance as a type of treaty reinsurance?

Answer 19

1. Excess of loss reinsurance - insurer will say anything above a certain amount, they’ll need reinsurance
2. Stop loss reinsurance - this is about the accumulation of claims you have

Question 20

What is excess of loss reinsurance as a type of non-proportional, treaty, reinsurance?

Answer 20

•Insurer will say anything above a certain amount, they’ll need reinsurance

•It pays out an excess over a certain amount of a loss, so coverage is bought/sold in layers to build a reinsurance programme

•Can build towers - another reinsure can take the above amount over the 1st reinsurer

•The insurer will need to consider the potential claim size to help decide how many layers it wants to buy to protect itself

Question 21

What is the benefit + disadvantage of excess of loss reinsurance as a type of non-proportional, treaty, reinsurance?

Answer 21

Protects insurers from very big claims, but large claims can burn through all its layers

Question 22

What is ‘reinstatement’ in excess of loss reinsurance as a type of non-proportional, treaty, reinsurance?

Answer 22

•Insurers can agree w/ reinsurers to ‘bring its policy back to life’, which allows it to collect more than 1 total loss during a year

•Most policies are capped at a certain amount of reinstatements (e.g. 4, so only 5 total losses can be paid)

Question 23

How do reinsurers determine the premium for excess of loss reinsurance as a type of non-proportional, treaty, reinsurance?

Answer 23

Reinsurers consider the policy limit (size of the layer) + how often the layer might have to pay claims

•Lower layers (‘working layers’) are more likely to have claims compared to higher layers (‘catastrophe layers’), as smaller claims are more frequent than larger ones

Question 24

How is premium payment structured for excess of loss reinsurance as a type of non-proportional, treaty, reinsurance?

Answer 24

Insurers will pay small amount up front + review figures at the end of the year when determining the price of reinsurance

•So, the cedent states what their actual ‘original gross premium income’ (OGPI) has been at the end of the year, so can calculate the of price of reinsurance

Question 25

What is stop loss reinsurance as a type of non-proportional, treaty, reinsurance?

Answer 25

This is about the accumulation of the claims you have

Question 26

What are the 2 types of premium?

Answer 26

1. Deposit premium - down payment payable which can be adjusted later + may be partly refunded 2. Minimum premium - the lowest amount of premium that will be payable on a contract

Question 27

What is deposit premium?

Answer 27

Down payment payable which can be adjusted later + may be partly refunded

Question 28

What is minimum premium?

Answer 28

The lowest amount of premium that will be payable on a contract

Question 29

What are 3 ways insurers involve reinsurers in decision-making for claims?

Answer 29

1. Full follow clause - insurer makes all claims decisions 2. Claims co-op clause - insurer keeps reinsurer updated on claims process 3. Claims control clause - reinsurer has full decision-making control

Question 30

What is ‘full follow clause’ as a way insurers involve reinsurers in decision-making for claims?

Answer 30

•Insurers make all the claims decisions + reinsurer pays their amount towards the claim •This is unpopular w/ reinsurers + popular w/ original insurers

Question 31

What is ‘claims co-op clause’ as a way insurers involve reinsurers in decision-making for claims?

Answer 31

•Original insurer has to advise the reinsurer of the loss + they keep them advised during their handling of the claim •But, reinsurer doesn’t have any rights to interfere w/ the insurer’s claims handling strategy + decision-making

Question 32

What is ‘claims control clause’ as a way insurers involve reinsurers in decision-making for claims?

Answer 32

•Reinsurer has full decision-making control •This is the reinsurers preferred option

Question 33

What are the 5 basic principles on constructing a reinsurance programme?

Answer 33

1. Insurer consider whether any individual risks are unusual + if so get facultative reinsurance 2. Insurer consider individual classes + consider reinsurabde for all risks for them - proportional contracts considered 1st, then non-proportional (excess of loss) 3. Insurer consider some excess of loss for a certain class or purchase a specific risk excess 4. Insurer consider some excess of loss for whole account 5. Consider catostroohe excess of loss protection for whole account

Question 34

What are the rules for the 5 basic principles on insurers constructing a reinsurance programme?

Answer 34

•Insurers don’t need to action points 1-3, but the reinsurers involved in 4-5 will want to know what reinsurance is being purchased under arrangements in point 1-3 •This is because reinsurers will want to know whether they’re the 1st point of call in any loss or are the likely to be picking up the balance of any claim not paid by other reinsurers

Question 35

Why were government based reinsurance programmes focused on providing terrorism-related reinsurance cover for commercial insurance market set up?

Answer 35

Due to the terrorism lossses following the city of London bombings in 1992 + 1993

Question 36

What is ‘terrorism risk insurance act’ (TIRA) + ‘terrorism risk insurance program reauthorisation act’ (TRIPRA) 2015?

Answer 36

•US government scheme as they want commercial insurers to continue to provide terrorism insurance for property •So, if a loss occurred that the commercial market had to pay out, the claims could be made on the government scheme •Similar systems exist in UK (Pool Re), France (Gareat), + Australia (ARPC)

Question 37

What is the Flood Re scheme in the UK?

Answer 37

•Every insurer in UK that offers home insurance must pay into this scheme •So, UK insurers can continue offering policyholders flood insurance, but then passes the flood element of the policy to the government as a reinsurer •So, if flood loss occurs, the original insurer pays + then claims the flood element from the Flood Re fund