Flashcards in Chapter 9 Deck (88)
Life insurance industry is built around concepts involving the transfer of financial risks. The transfer of risk provides what two basic benefits?
1. death benefit offsets by any fianancial loss incurred by the beneficiary due to the death of the insured,
2. payments made tot eh life insurance policy help stabalize the financial obligations of the policy owner. The policy owner is responsible for a series of relatively small, ongoing, regularly- scheduled premium payments instead of single, large, lump-sum benefit payements due to an unknown future date.
Reinsurance is the transfer of part of the hazards or risk that a direct insurer assumes by way of insurance contract or legal provision on behalf of an insred to a second insurance carrier, the reinsurer, who has no direct contractural relationship wihti the insured.
Most reinsurance arrangements are "indemnity" arrangements. What is this?
one of the key provisions is that there is no contractual relationship between the insured and the reinsurers.
The reinsurer is not obligated to make payments to the beneficiary, but to the direct carrier only. The direct carrier is ALWAYS obligateed to pay a legitimate claim.
Define: ceding company
the company that transfers its risk to a reinsurer. A cession is the document or electronic transmittal that describes the risk transferred, usually on an individual policy level.
define: reinsurance tready
is the written contract defining the reinsurance agreement. the ready defines the relationship between the ceding company and the reinsurance, the business to be covered under the tready, the reinsurance to be provided and its cost.
define a retention limit
the specified max amount of insurance that a life insurer is willing to carry at its own risk, on any one life
Define Retrocessionaire or "retro"
is a reinsurer that contractually accepts risk from another reinsurer.
- a retrocession is the risk ceded by a reinsurer to the retrocessionaire.
What the 5 broad benefits of working with reinsurance?
2. prevention of catastrophic loss
3. Market Entrance
4. Market Withdrawal
5. Reinsurance services
All insurance companies have constraints places on their ability to issue insurance.
One constraint is the retention limit. Define how they vary.
1. from amounts and are often a function of the company's size and financial resources, with larger comapnies they have larger limits. They can vary this limits based on a selection criteria such as age, underwriting classifications, or plan type.
how can a reinsurer help small insurance companies?
through increasing retention limits, the reinsurers allow a company to issue higher faceamount than the company retention limit, and they can help them grow and succeed.
How does reinsurance prevent catastrophic loss?
an large individual contract can be reinsurerd, allowing the direct carrier to recoup some or all, of the claim.
- using RI allows a direct writing company to spread the risk among other insurance carriers.
True or False
the more risk spread amount various insurers, reinsurers, and retrocessionaires, the less impact any single claim will have on any single company and the more financially stable the reinsurance arrangement will be.
thats why direct carries will sometimes ask several reinsurers to participate ina reinsurance treaty insread of electing to rely on a single company.
What is a reinsurance pool?
when several reinsurers share the reinsurance coverage on the same risk.
A direct writing company is subject to additional risks when entering a new insurance market or introducing a new product. How can a RI help with this?
1. Direct insure may not have the expertise. Veteran reinsurers have contracts through the industry and their knowledge can be used.
2. until a large number of policies is ussed, the mortability of that block of business may not be as expected. the RI they can keep the direct carrier from the effects of volatile mortability until the # of policies increases and mortality is more predictable
3. each claim has a high financial impact when only a few policies are in force. When using RI for these polciies, means that each claim affects the cede company less.
Insurance mortality is based on the statistical "law of large numbers". what is this?
The law of large numbers states that the greater the number of occurances that take place:
1) the more accurate the prediction of future results
2) the less the deviation of the actual losses from the expected losses
3) the more reliable the prediction will be
How can a reinsurance company also benefit the direct writing company that is leaving a particular market?
the direct company can arrange to reinsure or sell outright an entire block of policies to an itnerested reinsurer.
What is assumption reinsurance?
if a direct writing company permanently transfers all of its contractural obligations on the assumed risk to the reinsurer.
What are some additional reinsurance services that a direct company may see when working with a RI>
1. assisting comapnies entering new markets
2. provide resoures and knowledge that the direct carries may not have in u/w, actuarial science, claims, product development, and policy administrations.
-ie. traninig, conducting and publishing u/w research and making presentations at local, national, and international UW meetings.
Define policy reserves `
an amount of money put aside by the direct carrier to cover actual or potential liabilities owed to policholders. in the event of a claim, the direct carrier uses the cash put aside in the company reserves to make payment on the death claim.
what is the goal of financial reinsurance?
provide reflief to the capital requirements of a direct writing company.
Financial reinsurance covers non-material risks such as what?
1. policy persistency
3. cash values
4. reserve requirements (as noted)
5. secondary guarantees
6. return of premiums
Name examples of Mortalikty risk transfer between direct companies and reinsurers.
YRT- excess of retention
YRT- Quota share
Define YRT (yearly renewable Term)
here the ceding company pays reinsurance premiums to the reinsurer that are based on the age and gender of the insured and duration of the contract.
- premiums usual increase
What happens in a YRT excess of retention arrangements?
the direct carrier will retain amounts up to its retention limit and then use reinsurance.
What happens in a YRT quota share.
premiums and losses are shared proportionately between the ceding company and the reinsurer.
- allows the use of reinsurance before the company retention is exhausted. the direct company retains a fixed percentage of the risk and cedes the remaining percentage to the insurer.
- first-dollar arrangements or excess of certain amount of retention
What is a first-dollar quota share,
here the company cedes a portion and retains a portion of every dollar of insurance coverage, up to its retention.
what is coinsurance?
a reinsurance arrangement in which the assuming company receives a portions hare of all the risks and cash flows of the policy.
- all the premiums are shared
- requires the reinsurance company to set up admin services that mirro and integrate with that of the ceding company. can be expensive
- good for when ceding company is small and needs RI support,
Name some the types of reinsurance underwrirting arrangements that may exist between direct companies and the reinsurers.
1. Faculatative reinsurance
how does facultative reinsurance work?
requires direct carrier to submit the u/w evidence to the RI, and the RI formally approves any reinsurance request before accepting coverage.
- OG method being replaced by auto RI
- used when direct carrier is seeking alternative evaluation or offer on a dec.