Module 4: Reinsurance Flashcards
(37 cards)
What is reinsurance?
Reinsurance is insurance purchased by insurers in order to transfer a portion of their insured risks to other insurers.
What other reasons are there for writing a reinsurance contract?
- It is a way for an insurer to enter a new market (for example, property or aviation) without the effort and expense of employing new underwriters.
- It also allows insurers to work in parts of the world where the local regulations only permit local insurers to write direct risks but are more flexible about reinsurance to ensure that the risks are well spread.
- It is a balancing act for the direct insurers buying it in that they do not want to pay out too much of their hard earned inwards premium (i.e that charged on the direct risks they have written)
But, in turn, they want to protect themselves against an unexpected large loss like a hurricane or an oil refinery exploding.
What does to cede mean?
The verb used which means to transfer.
What does cedant mean?
The organisation buying the reinsurance or transferring the risk.
What does cession mean?
The noun describing what is being transferred - i.e. the risk
What is a reinsurance programme?
A combination of different types of reinsurance that the insurers construct, having analysed their book of business and tried to calculate where they need protection and how best to obtain maximum protection for minimum payment of premium.
What is facultative reinsurance?
Reinsurance that only covers a single risk.
What is treaty reinsurance?
Reinsurance that covers a variety of risks.
An agreement is usually set up for a whole year whereby both parties agree that risks will be automatically ceded or bound to the treaty.
A treaty can protect an individual line of business.
For example, cargo or property, or can protect all marine lines or all aviation lines, or could actually be set up to protect everything that the insurer wrote during a certain year of account or underwriting period.
What is facultative/obligatory reinsurance?
A blend between fac and a treaty where the original insurer has the choice as to which risks to present to his reinsurer; but if he does present them, then the reinsurer is obliged to accept them.
What does a reinsurer consider when he is presented with a risk?
- What is the cedant’s business like?
- How do they run their business?
- Do they have proper systems for collecting data about the risks that they write so they can provide you, as the reinsurer, with proper data?
What is the hours clause?
If there is a storm or other natural catastrophe, then the reinsurers can cap their likely exposure by saying that the original insurer can only group together those losses it receives that fall within a tight time window, usually 72 or 96 hours.
This means that for a storm that lasts a long time the original insurer will probably have to pay two excesses on his reinsurance as he will have to split his claim to his reinsurance into two.
What is the full reinsurance clause?
This is also known as a back to back clause and the intention is that the reinsurance will mirror the original insurance loss written so that there are no gaps.
Reinsurers have to be very careful in these situations that they know exactly on what terms and conditions the original placement has been made as the idea with this clause is that reinsurers will generally pay up what they owe with little or no question.
What is the claims control clause?
The reinsurer has full control over claims and dictates how they are handled and when and if they are paid.
This type of clause will often be used when the amount of the risk remaining with the original insurer is very small (say 0.5%) and, essentially, it is reinsurers’ money that they are using.
What is the claims co-operation clause?
A clause which requires the original insurer to promptly advise the reinsurer, keep them advised and co-operate with them etc. but does not give the reinsurer the final say in whether the original insurer actually pays the claim.
What does risks attaching basis mean?
This means that any risk written by the original insurer (cedant) during the reinsurance treaty period - say, 12 months at 1 January 2010, will be covered under the reinsurance.
It doesn’t matter what the date of loss is, as long as the date the risk attached can be identified and it is within the treaty period.
What does losses occurring basis mean?
This means that the date of loss must be within the reinsurance treaty period, irrespective of when the risk attached which may be before the reinsurance treaty came into effect.
What does claims made/losses discovered basis mean?
The claim must be made against the original insurer during the reinsurance treaty period. This is most often used for long-tail risks where the original policies should also be written on that basis.
What is the order to claim on reinsurance?
The general rule, in terms of the order to claim on reinsurance, is that the more specific the policy, the nearer to the front of the claim queue it stands.
- Fac reinsurance will always be claimed on first if it exists.
- Specific treaties such as a property or hull treaty will always be claimed on before a more general marine or non-marine treaty.
- Whole account treaties will be claimed on last.
How does proportional reinsurance operate?
The reinsurer receives an agreed share of the premium and pays the same portion of any loss.
The key concept in relation to proportional reinsurance is that of sharing and more particularly sharing of both premiums and claims in equal proportions.
What is a quota share?
It can be imagined as pie chart with a slice of the pie representing the cession of premium to the reinsurer and the share of any claims that he will pay.
Quota share calculation example:
A risk of £2,000,000 producing a premium of £2,000. The insurance company has a 30% quota share treaty. It is asked to pay a £450,000
claim.
How much of the risk, premium and claim is retained and ceded?
Risk retention: £1,400,000
70% of £2,000,000.
Premium retention: £1,400
70% of £2,000.
Risk cession: £600,000
30% of £2,000,000.
Premium cession: £600
30% of £2,000.
Claim retained: £315,000
70% of 450,000.
Claim ceded: £135,000
30% of 450,000.
What is a surplus treaty?
Surplus treaties involve variable quota shares.
The underwriter defines his maximum retained line (i.e. the maximum size of line he can share of any risk.
He can then increase that limit through obtaining identical clones or replicas of that line.
The maximum amount he obtains is entirely down go how much he is prepared to pay in premium and whether there are reinsurers prepared to write his reinsurance.
Surplus treaty calculation example:
How might a surplus cession work for a company whose maximum retained line is £1,000,000?
Risks
1 - original sum insured £1,000,000.
Company retains £1,000,000. Cedes £0 to the surplus.
2 - original sum insured £2,000,000.
Company retains £1,000,000. Cedes £1,000,000 to the surplus (50%. £1,000,000 to reinsurer 1).
- original sum insured £3,600,000.
Company retains £1,000,000. Cedes £2,600,000 to the surplus (83.3%. £1,000,000 to reinsurer 1, £1,000,000 to reinsurer 2 and £600,000 to reinsurer 3).
What is a probable maximum loss?
The original insurer will decide what excess or retention he is happy to retain (along the same principles as with direct insurance) and then buys reinsurance to stack on top to a level at which they believe they will be covered for the biggest loss they might have.
This calculation of the largest loss they might have is known as working out the probable maximum loss - it will vary based on a number of factors, such as the type of risk and the locations.
