Rplu Mod 4: Pli Reinsurance

Front 1

Define Reinsurance

Back 1

Insurance for Insurance Companies, helping them fulfill their obligations to their insureds and create financial risk transfer, protecting them from catastrophic losses.

Front 2

Describe Insured vs. Insurer

Back 2

The insured purchases policy coverage from the insurer by paying premium. The insurer assumes the exposure to possible future loss covered by the purchased policy.

Front 3

Describe Cedant / Reinsured vs. Reinsurer

Back 3

The cedant is the insurer that transfers some or all of the exposures to a reinsurance company, called the reinsurer, bound by a reinsurance agreement. The cedant pays premiums and both parties must fulfill their contractual obligations under the reinsurance agreement.

Front 4

What is a retrocessionaire?

Back 4

When the reinsurer decides to reinsure the reinsurance (!) the additional reinsurer is called a retrocessionaire. The reinsured in this case is called the retrocedent. The agreement is called a retrocession.

Front 5

The implied principle supporting a high level of trust between cedant and reinsurer, including disclosure of material information about exposures and the ability to fulfill financial obligations to the cedant.

Back 5

Utmost good faith

Front 6

When the reinsurer must follow the decisions made on particular claims or policy interpretations of the cedant. It is in place to avoid disputes between the two parties.

Back 6

Follow the fortunes.

Front 7

Capacity

Back 7

The maximum amount of liability that an insurance company is able to assume as restricted by insurance regulators in order to maintain said insurers financial stability.

Capacity is based upon an insurers policyholders surplus.

Front 8

The exchange of reinsurance between two or more insurers where they agree to reinsure a portion of each others insurance obligations. Two insurance companies reinsure each other.

Back 8

Reciprocity

Front 9

Syndicate

Back 9

A group of financial backers, that provide reinsurance to its members. more than one policy that jointly covers an insurance exposure is issued.

Front 10

What is co insurance and how does it differ from reinsurance?

Back 10

Co insurance is where two insurers agree to insure a primary insured subject to the policy terms and conditions.

Reinsurance is where an insurer engages with a reinsurer, where a direct relationship with the primary insured is NOT created.

Front 11

What is partnership and does it apply to reinsurance?

Back 11

Partnership implies that two organizations have similar knowledge and share results equally, and can terminate when so desired.

Reinsurance is NOT a partnership - or a type of business organization. IT is a risk management tool used by insurers to manage their exposures. Reinsurance is the transfer of liability.

Front 12

Name 3 types of insurance companies have a greater need for reinsurance?

Back 12

1. Insurers managing commercial lines (vs. personal), because of higher limits.

2. Professional liability insurers because of uncertain tort environments and severity.

3. New entrants to the market with small amount of capital.

4. Prevailing market conditions and/or newly imposted regulations also create a need.f

Front 13

Define and apply Policyholders surplus based on $500M of policyholders surplus at an insurance company.

Back 13

10% of of policyholders surplus of $500M would be a maximum of $50M any one exposure. This is known as the 10% capacity rule.

Front 14

What are 3 reasons insurers secure reinsurance in order to increase capacity?

Back 14

To Increase:

1. Large line capacity (allowing insurer to write higher limits on a single exposure).

2. Premium volume capacity (allowing insurers to write premium volume at limits of liability greater than their financial capacity. See premium to surplus ratio)

3. Surplus relief (See separate definition)

Ultimately allowing insurers to write MORE Premium with MORE limits than they'd otherwise be able to write; and capital can be freed from policyholder surplus to expand into new products, classes and geography.

Hint 14

L, P, S

Front 15

What is Insurers Line called in

1. Property insurance

2. liability insurance

Back 15

1. Risk Capacity

2. Policy Limit

Front 16

Define and Apply premium to surplus ratio:

Written Premium: $5M

Net written Premium (less reinsurance:) $1.5M

What should be the policyholders surplus?

Back 16

Premium to surplus ratio is:

Premium (net of reinsurance) to surplus ratio not exceeding 3:1

If the net written premium is $1.5M then the policyholders surplus should be $500k:

$1.5M / x = 3

$1.5M / 3

x = $500k

Surplus Relief: NO MORE than 3:1

Front 17

Define Surplus relief

Back 17

Reinsurers reimbursement of prepaid acquisition costs associated with shared premiums to cedant. Therefore the cedant will prevent the depletion of the policyholders surplus.

Front 18

What are FIVE GENERAL reasons for insurers to purchase reinsurance?

Back 18

CS-CS-WEP

1. Increase Capacity.

2. Stabilize underwriting results over time.

3. protect from catastrophic risks

4. Surplus Relief

5. Enables withdrawal from geography or class.

6. Gain UW, claims & actuarial expertise provided by reinsurer.

7. Enables portfolio transfers

Hint 18

CS - CS - WEP

Front 19

In casualty Lines, when a single catastrophic event affects multiple policies held by one insurer.

Back 19

Clash Event

(In property, called catastrophe)

Front 20

Describe the mechanics of a portfolio transfer.

Back 20

Insurer decides to withdraw from market.

Insurer / Cedant purchases reinsurance on that book of business.

Insurer / cedant typically remains responsible for the handling of the insurance policies.

Reinsurer pays all losses associated with book.

Front 21

In a syndicate, does the failure of one reinsurer sharing the exposure increase the liabilities of the remaining insurers?

Back 21

No. In reinsurance, the liability of the reinsurers is several, not joint.

The failure of one reinsurer does not increase the liabilities of the remaining reinsurers.

Front 22

What is a direct market reinsurer vs. a broker market reinsurer?

Back 22

Direct market: cedant procures reinsurance via their own internal marketing / sales force and the reinsurers account executive (who operates in a similar function to a broker via needs assessment.)

Broker Market: cedant procures reinsurance via a broker intermediary. The broker acts as a rep of the insurer, and is compensated by a commission. Using a broker market allows for a greater availability of market to both parties.

Front 23

Name 2 Advantages/ disadvantages of a direct market reinsurer.

Back 23

A. more direct equals greater efficiency in identifying needs.

A. more direct equals better opportunity for expansion.

D. Smaller than the main reinsurance market.

D. Account executives work for reinsurer (vs. insured.)

Front 24

Name 2 advantages / disadvantages of a broker market reinsurer.

Back 24

A. Cost efficiencies by relying on broker vs. own internal knowledge of broader reinsurance market.

A. broker works on behalf of insurer, with experience in negotiating and dispute resolution.

D. Third party communication channels may not be clear.

D. Acquiring uw expertise from reinsurer may be more challenging because of supply chain.

Front 25

Name the three types of US Reinsurance markets:

Back 25

Admitted, licensed in state to do business

Non Admitted, not licensed in state to do business

Off shore (bermuda & London)

Front 26

Reinsurance covering individual risks when an individual risk or only a handful of exposures need protection and the volume is not great enough or the risk are too dissimilar to qualify as a group.

Back 26

Facultative reinsurance

Front 27

Reinsurance covering a group, class or portfolio, where insurer and reinsurer believe that the number size and type of exposure is compatible and can enable the law of large numbers to produce profitable results. Obligatory, or automatic

Back 27

Treaty reinsurance

Front 28

Multi Line Reinsurance Treaty

Back 28

Where a treaty includes more than one class of business i.e. D&O and E&O. May provide that one class can offset the the poor experience of another, making the overall results more profitable.

Front 29

Mono Line Treaty OR Limited Reinsurance Treaty

Back 29

Where a treaty reinsurance contract includes only one class, i.e. D&O ONLY and no other. Provides focus of profitability on singular class, because the results should be easier to manage and mitigate.

Front 30

When a reinsurance treaty provides only for losses occurring or claims made between the treaty's inception and expiration dates.

Back 30

Losses Occurring / Claims Made During Treaty

Front 31

When a treaty covers all insurance policies written or renewed between the treaty's inception and expiration date.

Back 31

Policies attaching basis treaty

Front 32

Describe Cut Off Vs. Run Off

Back 32

Cut Off - When a reinsurer is no longer responsible for paying new claims after a treaty contract expires. The reinsurer is required to pay the insurer any unearned premiums associated as of the termination date.

Run off - When a reinsurer will remain responsible for paying claims after termination. If occurrence policies are written this may be a very long time. The insurer (& primary insured) would need to be able to prove the claim occurred or was made during the reinsurance agreement. No unearned premiums are repaid.

Front 33

Semi-Automatic Facultative Placement

Back 33

A limited agreement to to reinsure each exposure before reinsurers complete an individual evaluation of risk. IT is agreed that the reinsurer accept agreed upon exposures. The reinsurer then has the option to cancel individual risks within a specified timeframe (say 48 hours) or it automatically assumes the reinsured risks.

Front 34

Automatic Facultative Placement

Back 34

Require the reinsurer to accept all policies that meet certain exposure criteria agreed by both parties.

The cedant / reinsured is not obligated to cede all policies.

Front 35

The insurer and reinsurer share premiums, losses and expenses based upon specific percentages.

Reinsured or cedant?

Back 35

Proportional or Pro-Rata

Cedant

Quota Share: % agreed upon during negotiations

Surplus Share: % determined by relationship of retained amount to the policy limits.

Front 36

The premium is determined by applying a specific rate to the total premium for policies subject to the treaty. The reinsured retains the specified portion (retention) of the loss and the reinsurer reimburses (indemnifies) the the reinsured for the portion that exceeds the retention.

Reinsured or cedant?

Back 36

Non Proportional or Excess of Loss

Reinsured

Front 37

Describe Ceding Commission

Back 37

The cedant typically reduces the amount of premium ceded to the reinsurer by an agreed percentage to cover expenses incurred when policies are written (acquisition costs), which include agent's commission, premium taxes, and other expenses assumed during underwriting.

Front 38

Quota Share Treaty Agreement

5M Premium

75% reinsurance purchased

20% ceding commission

100,000 loss

How much Premium to reinsurer? cedant?

How much loss to reinsurer? cedant?

Back 38

Premium:

5M x 25% = 3.75M less 20% (750K) = 3M

5M x 25% = 1.25M plus 750K = 2M

Loss shared equally without commission involve:

100k x 75% = 75k

100k x 25% = 25K

Front 39

Describe a Non Proportional / Excess of Loss Treaty Arrangement

Back 39

Not a share in percentage of limits but rather an agreed amount paid above a retention or attachment point.

Reinsurer will indemnify their portion of the loss in excess of the retention up to the maximum amount of reinsurance coverage.

Front 40

Describe Clash (Non Proportional) reinsurance

Back 40

Reinsurance that indemnifies an insurer to avoid multiple exposures to their retention amounts. I.E. Doctor, Nurse & Entity are all insured and all result in limit loss. Clash insurance will allow them to be exposed to only one retention vs. 3.

Front 41

What are the three types of non proportional treaties available to limit reinsurers aggregate limits?

Back 41

Excess per risk

Excess per Occ / Claim

Excess Per Policy

Front 42

What is EOC - Extra Contractual Obligations?

What is XPL - Excess of Policy Limits?

Back 42

These are reinsurance provisions within the contract that are reinsuring the business of being an insurer vs. the individual claim. I .E. EOC would insure court judgements for bad faith or a court awarding judgments for a policy that should have excluded it. XPL would cover any judgement in addition to the policy limits. A

Front 43

Describe Stop Loss / Aggregate Agreements and when are they used? What is a typical policy period?

Back 43

Reinsurer agrees to provide reimbursement for losses once the reinsured has an aggregate or sum total of losses occurred exceeding the pre-determined retention.

They are not widely available. They are primarily used in property classes including crop hail and auto physical damage.

Typically only 12 months

Front 44

Describe a standard reinsurance contract.

Back 44

The industry does not have standard contract. They can be drafted by both parties, assuming the form is legal and not against public policy.

However, most forms contain Articles, which are commonly found provisions in most contracts.

Front 45

What is a reinsurance proposal?

Back 45

The offer of reinsurance from a potential reinsurer to a cedant / reinsured. It should address: articles, limits, Underwriting, pricing.

Front 46

Name 5 items to consider when assessing reinsurance proposals.

Back 46

C-FISP

1. Cost

2. Financial strength

3. Industry Standing

4. Services

5. Payment Terms

Hint 46

C-FISP

Front 47

5 Elements used to analyze a reinsurers financial strength?

Back 47

RRSSA

1. Regulatory Agencies

2. Rating Agencies

3. Surplus Levels

4. Size & Age

5. Associated Agencies - Financial Strength & Influence

Hint 47

RRSSA

Front 48

Describe a Captive

Back 48

Owned, organized and controlled by a parent company, which can be a single non insured company OR a group of insureds. Captives are organized to provide insurance to the parent company, its subsidiaries, affiliates or members. 'Captives are insuring / reinsuring themselves'

Front 49

Describe a Risk Retention Group

Back 49

A company owned and controlled by a group of similar insureds, where policyholders are stockholders. RRG's were created under the Fed Liability RR Act of 1986 which provides exception from certain state and federal regulations.

Front 50

Describe a front company

Back 50

A primary insurance company who writes the policy and reinsures 100% of the risk therefore assuming no risk.

Front 51

What is 10% capacity rule?

Back 51

A state requirement providing the maximum limit of liability for each policy or exposure must not exceed 10% of an insurers policyholder surplus.

Front 52

Policyholders surplus

Back 52

The value of an insurer equity measured by subtracting insurer liabilities from its assets.

Front 53

Sliding Scale Commission

Back 53

A type of commission where the reinsurer may agree to adjust the ceded commission up/downward based on the loss ratio of the insurance business.

Front 54

Several Liability

Back 54

Each reinsurer is liable for their own share of exposure reflected in the contract and indicates that the failure of one insurer does not increase the liabilities of the others.

Front 55

Service of Suit Article

Back 55

For non admitted / foreign insurers, this article describes what party should receive legal notice if any disputes arise from the agreement / contract. (At CNA we called this jurisdiction.)

Front 56

Offset Article

Back 56

An article provision which permits (typically a proportional treaty arrangements) to net amounts due between them pertaining to the particular treaty and any other treaties.

Front 57

When the reinsured is allowed to purchase other reinsurance including fac, that shall insure to the benefit of the treaty contract.

Back 57

Other Insurance Article

Front 58

Stop Loss

Back 58

A form of aggregate, non proportional agreement where the reinsurers retention and limit are stated as dollar amounts.

Front 59

Interests and Liabilities Agreement (I&L)

Back 59

An article which specifies the individual interests of the subscribing reinsurers when more than one reinsurer provides coverage. Interests are several, not joint.

Front 60

a reinsurance article that provides that a reinsurer is liable to pay the reinsurance portion of covered claims by the pedant / reinsured in the event that the reinsured becomes insolvent - whether or not the reinsured has paid the original insured.

Back 60

Insolvency Clause / Article

Front 61

What article is used in a broker market transaction?

Back 61

Intermediary article specifying the intermediary involved and their involvement in information sharing, etc.

Front 62

True / False: London is a significant Player in the PLI insurance and reinsurance market.

Back 62

TRUE