Reinsurance Elliot Webb Capter 1

Front 1

6 Functions of Reinsurance (functions it can perform for the primary Insurer)

Back 1

1 Capacity
2 Stability
3 Catastrophe Protection
4 Surplus Relief
5 Underwriting expertise
6 Withrawal from a territory or line of business

Hint 1

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Front 2

5 subjects a Reinsurance Underwriter Should be Familiar with

Back 2

1 Loss Exposures and Primary Insurance Coverages
2 Primary Insurance Pricing
3 Loss Reserving by Primary Underwriters
4 Facultative Certificate and Treaty Contract Wording
5 Financial Analysis of Primary Insurers

Front 3

3 Items that a Primary Insurer can take credit for in their Annual Statement with respect to reinsurance

Back 3

1 Unearned premium reserve ceded to the reinsurer (a liablity)
2 Loss reserves covered by the reinsurance agreement (a liability)
3 Paid loss recoverables from the reinsurer (an asset)

Front 4

2 ratios to look at to evaluate a reinsurers strength

Back 4

1 Profitability Ratios = (Operating Income/Earned Premiums)
2 Liquidity Ratios (Liabilities/Policyholder's surplus)

Front 5

2 insurer concerns about Reinsurers

Back 5

1 Understatement of reserves (to give a false appearance of Financial Strength)
2 A Reinsurers Size (Since large reinsurers are less likely to depend on potentially weak retrocessions)

Front 6

2 Reinsurer Concerns about Primary Insurers

Back 6

1 Financial Strength of the Primary Insurers
2 An Insurers Ability to Pay Reinsurance Premiums

Front 7

5 Types of Reinsurers

Back 7

1 Admitted Professional Reinsurers
2 Reinsurance Departments of Admitted Primary Insurers
3 Unauthorized Alien Reinsurers
4 Reinsurance Pools and Associations
5 Reinsurance Management Companies (a.k.a. Reinsurance Underwriting Agents)

Front 8

3 Advantages and 2 Disadvantages of Forming a Professional Reinsurer

Back 8

Advantage 1 - Primary Insurers are less reluctant to share their trade secrets to a reinsurer than to another primary insurer
Advantage 2 - Other Professional Reinsurers are more likely to consider such an entity as an equal, fascilitating favorable retrocessional agreements
Advantage 3 - The sign of committment to the reinsuance business aides in the recruitment of skilled reinsurance employees and intermediaries
Disadvantage 1 - The cost of running a separate Corporation (including the required capital)
Disadvantage 2 - The necessity of Disclosing Operating Results separately from the consolidated results of the parent company

Front 9

2 Advantages of Participating in a Reinsurance Pool

Back 9

1 No Expertise either in reinsurance or in the type of property or operations reinsured is needed, since large pools are ussualy managed by their own personnel (ideal for small or alien reinsurers)
2 Provides large reinsurers with a steady flow of business at a minimum cost to each participant.

Front 10

3 Advantages and 2 Disadvantages
Using a Reinsurance Management Company vs. hiring reinsurance personnel

Back 10

Advantage 1 - Immediate access to skilled Reinsurance Personnel (key to a newly formed reinsurer)
Advantage 2 - Low Fixed Costs
Advantage 3 - Immediate access to Insurers and Reinsurers currently served by the management companies
Disadvantage 1 - lack of direct control (must rely on the management company to have a high level of technical skill, managerial ability, and integrity
Disadvantage 2 - The cost of management company services might exceed the cost of an employed management team as a reinsurer grows

Front 11

4 Duties of a Reinsurance Intermediary (a.k.a. Broker)

Back 11

1 To obtain the desired reinsurance protection on the best terms available
2 To inquire about the financial strength of the selected reinsurers
3 To promptly transmit funds and communications between Reinsurer and insurer
4 To account for all funds recieved from or transmitted to the insurer or reinsurer

Front 12

3 Advantages and 4 Disadvantages Dealing with Intermediaries

Back 12

Advantage 1 - Has experience in structuring reinsurance programs and negotiating better terms and conditions with reinsurers
Advantage 2 - Has access to many reinsurers around the world, and can therefore increase the reinsurance capacity available to the insurer
Advantage 3 - Provide Greater Leverage in negotiating disputes with reinsurers
Disadvantage 1 - Introduction of a third-party might slow communications and increase misunderstanding
Disadvantage 2 - Some reinsurers used by the intermediary may be relatively small with a small amount of surplus
Disadvantage 3 - Intermediary comissions add to the cost of reinsurance
Disadvantage 4 -Intermediary Insolvency would have severe repercussions for both insurer and reinsurer

Front 13

4 Advantages and 2 Disadvantages of Dealing with Direct-Writing Reinsurers

Back 13

Advantage 1 - Ca n Often Provide all or Most of the reinsurance needed by an insurer, due to their size
Advantage 2 - Are willing to reinsure multiple lines of business with offsetting levels of profitablity (loss)
Advantage 3 - Are likely to be financially strong, offering greater security to their primary insurers
Advantage 4 - May be able to charge a lower premium, due to the lack of an intermediary
Disadvantage 1 - Direct-writer reinsurers are working primarily for their own interests
Disadvantage 2 - Lack of Interaction with other reinsurers for placement opportunities (the market cannot be searched as easily for the best price and terms)

Front 14

2 Types of Pro-Rata (proportional) Reinsurance

Back 14

1a Quota Share
1b Variable Quota Share
2 Surplus Share

Front 15

2 Advantages of a vaiable quota share treaty to a standard quota share treaty

Back 15

1 Has the advantage of retaining a larger portion of the smaller risks thast are within its financial capability to absorb
2 MAintains a safer and smaller retention on larger risks

Front 16

5 Catagories of Excess of Loss Reinsurance

Back 16

Per Risk Excess
Catastrophe Excess
Per Policy Excess
Per Occurrence Excess
Aggregate Excess

Front 17

4 Purposes of the Reinsureing Clause

Back 17

1 Further Define the terms and conditions of the coverage provided
2 Establishes the obligatory nature of the cessions under the treaty, and wether the treaty is excess or pro-rata
3 Describes the classes of business covered
4 Defines the basis of attachment for policies (ie policies-attaching basis or lossess-occuring basis

Front 18

4 Purposes of the "Service of Suit Clause"

Back 18

1 Gives the insurer legal remedy to collect sums due under the policy
2 ratifies the reinsurers' legal rights to commence an action in any court of its choosing that has juristiction
3 Names an agent for service of process (ie law firm or an insurance commissioner)
4 Requires that a reinsurer agrees to abide by the final decision oof the court, allowing, however, for the appeals process

Front 19

3 Advantages of Excess of Loss Treaties over Pro-Rata

Back 19

1 It allows the Primary Insurer to retain more of its Gross Premium (ideaaly to retain more of its profitable risks) income for its own
2 Is easy to administer
3 Settlements are generally in cash within a relatively short period of time after the reinsurer receives notice of loss

Front 20

2 Disadvantages of Excess of Loss Treaties over Pro-Rata

Back 20

1 The insurer must bear any increase in the frequency of losses below the retention
2 The insurer is still responsible for maintaining the UEPR, and thus does not receive assistance with its business expansion

Front 21

Property Per Risk XOL Treaties

3 Methods to calculate Pure Premium Rate

Back 21

1 First-Loss Scale
2 Discount of Proportional Premium
3 Price Per Million

Front 22

Property Per Risk XOL Treaties

4 Reason sfor Modifying Pure Premium or Tabular Rate for First Loss Scale Exposure Rating

Back 22

1 Adequacy of Primary Rates
2 Mix of PML risk Types and Deductibles
3 Quality of Underwriting
4 Profit and Expense Loads

Front 23

Property Per Risk XOL Treaties

-- Experience Rating--
4 Steps in Experience Rating

Back 23

1 Collecting the Required Underwriting Information
2 Trending Losses
3 Developing Experience Rate
4 Pricing the Unused portion of the layer

Front 24

Property Per Risk XOL Treaties

5 additional things that must be loaded to the Pure Loss Rate (developed either by Experience or Expposure Rating)

Back 24

1 Operating Expenses
2 Retrocessional Costs
3 Profit and Contingency Loading
4 Allocated Loss Adjustment Expenses
5 Catastrophe Charge

Front 25

Casualty XOL Treaties

3 Functions of CXOL Treaties

Back 25

1 Provide Stability from losses from one occurrence, smoothing results for quarterly and annual reporting
2 Increase Risk Capacity for Writing Business
3 Provide Catastrophe Protection

Front 26

Casualty XOL Treaties

--3 Reasons For---

Why Should Declatory Judgment Action (DJA) Expenses be Covered when the treaty does not specifically address them

Back 26

1 Treated Like any other claim-related ALAE
2 Reinsurer Benefits from successful declaratory judgment actions
3 The "follow the fortunes" doctrine requires coverage for declaratory judgment expenses

Front 27

Casualty XOL Treaties

--3 Reasons For---

Why Should Declatory Judgment Action (DJA) Expenses NOT BE Covered when the treaty does not specifically address them

Back 27

1 DJA expenses are not the result of claims handling but of an adversarial proceeding and therefore are not ALAE
2 Treaty does not specifically say that DJA expenses are covered
3 The "follow the fortunes" doctrine cannot create coverage where it doesn't exist

Front 28

Casualty XOL Treaties

--Reconciling Experience and Exposure Rates--

3 Factors You should Consider when Reconciling the Exposure Rates

Back 28

1 Accuracy and credibility of predicted distribution
2 Accuracy of Increased Limit Factors excess or Retentions
3 Degree of Exposure not Contemplated by ILF

Front 29

Casualty XOL Treaties

--Reconciling Experience and Exposure Rates--

5 Factors You should Consider when Reconciling the Experience Rates

Back 29

1 Accuracy of Estimations of Claims Cost Inflation Trend
2 Accuracy of Estimations of excess loss development
3 Accuracy of Subject premium on-level Factors
4 Accuracy of Statistical Sampling
5 Stability of Estimated Loss Costs

Front 30

Catastrophe XOL Treaties

3 Functions of Cat XOL Treaties

Back 30

1 Severity Protection
2 Stabilization of Underwriting Results
3 Promotion of Risk Distribution

Front 31

Catastrophe XOL Treaties

3 Ways Severity Protection is Provided

Back 31

1 Cat Treaties prevent an Occurrence from seriously impairing primary insurer's financial condition
2 Cat Treaties Protect primary insurer's policyholder's surplus from a sudden drain
3 Cat Treaties Protect primary insurer's ability to write New Business

Front 32

Catastrophe XOL Treaties

4 Ways Cat Treaties Stabilize Underwriting Results

Back 32

1 Primary Insurers can limit its losses to a pre-determined retention level per loss occurrence
2 Cat Treaties Allow Financial Effects of catastrophic Losses to be spread over several years
3 Helps Primary insurers avoid large fluctuations in earnings per share and wide swings in profit and loss
4 Primary Insurers can acheive more statistically predictable loss experience

Front 33

Catastrophe XOL Treaties

2 Reasons Why Experience Rating is generally not used in Pricing CAT XOL Treaties

Back 33

1 Not enough cat losses to accurately estimate future losses and future premiums
2 Business reinsured can change so quickly that actual losses might not be useful in estimating future losses

Front 34

Catastrophe XOL Treaties

4 Factors Affecting Catastrophe pricing

Back 34

1 Rates Charged by reinsurers are ussually independent of underlying rates
2 Attachment Point
3 Layering Limit
4 Characteristics of Book of Business being Reinsured

Front 35

Catastrophe XOL Treaties

6 Characteristics of the book being Reinsured

Back 35

1 Geographic Distribution of Exposures
2 Estimated Subject Premium for the year to be rated
3 Subject Premium and Loss history
4 Information by State
5 Property Residual Market facility participation
6 Miscellaneous Information

Front 36

Catastrophe XOL Treaties

2 Ways Geographical Distribution Affects Rates

Back 36

1 To accurately Estimate Probable Maximum Loss
2 To develop catastrophe rates