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CPCU 520 Chapter 8
CPCU 520 Chapter 8 Reinsurance Principles and Concepts
| Question | Answer |
|---|---|
| Reinsurance | the transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer agrees to indemnify another insurer for some or all of the financial consequences of certain loss exposures for a premium |
| Primary insurer | the insurer that transfers or cedes all or part of the insurance risk it has assumed to another insurer in a contractual agreement |
| Reinsurer | the insurer that assumes some or all of the potential costs of insured loss exposures of the primary insurer in a reinsurance contractual agreement |
| Reinsurance agreement | contract between the primary insurer and reinsurer that stipulates the form of reinsurance and the type of accounts to be reinsured. |
| Retention | The amount retained by the primary insurer in the reinsurance transaction. |
| Ceding commission | an amount paid by the reinsurer to the primary insurer to cover part or all of the primary insurer's policy acquisition expense |
| Retrocession | a reinsurance agreement whereby one reinsurer (the retrocedent) transfers all or part of the reinsurance risk it has assumed or will assume to another reinsurer (the retrocessionaire) |
| Retrocedent | the reinsurer that transfers or cedes all or part of the insurance risk it has assumed to another reinsurer |
| Retrocessionaire | the reinsurer that assumes all or part of the reinsurance risk accepted by another reinsurer |
| Principal functions for primary insurer | increase large-line capacity; provide catastrophe protection; stabilize loss experience, provide surplus relief; facilitate withdrawal from a market segment; provide underwriting guidance |
| Large-line capacity | an insurer's ability to provide larger amounts of insurance for property loss exposures, or higher limits of liability for liability loss exposures, than it is otherwise willing to provide |
| Line | the maximum amount of insurance or limit of liability that an insurer will accept on a single loss exposure |
| Surplus relief | a replenishment of policyholders' surplus provided by the ceding commission paid to the primary insurer by the reinsurer |
| Portfolio reinsurance | reinsurance that transfers to the reinsurer liability for an entire type of insurance, territory, or book of business after the primary insurer has issued the policies |
| Novation | an agreement under which one insurer or reinsurer is substituted for another |
| Professional reinsurer | an insurer whose primary business purpose is serving other insurers' reinsurance needs |
| Reinsurance intermediary | an intermediary that works with primary insurers to develop reinsurance programs and that negotiates contracts of reinsurance between the primary insurer and reinsurer, receiving commission for placement and other services rendered |
| Reinsurance pools, syndicates and associations | groups of insurers that share the loss exposures of the group, usually through reinsurance |
| Reinsurance pool | a reinsurance association that consists of several unrelated insurers or reinsurers that have joined to insure risks the individual members are unwilling to individually insure |
| Syndicate | a group of insurers or reinsurers involved in joint underwriting to insure major risks that are beyond the capacity of a single insurer or reinsurer; each syndicate member accepts predetermined shares of premium, losses, expenses, and profits |
| Associations | an organization of member companies that reinsure by fixed percentage the total amount of insurance appearing on policies issued by the organization. |
| Types of reinsurance | Treaty and facultative |
| Treaty reinsurance | provides primary insurers with the certainty needed to formulate underwriting policy and develop underwriting guidelines. The reinsurer agrees in advance to reinsure all the loss exposures that fall under the treaty. |
| Facultative certificate of reinsurance | an agreement that defines the terms of the facultative reinsurance coverage on a specific loss expsure |
| Pro rata reinsurance | a type of reinsurance in which the primary insurer and reinsurer proportionately share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) |
| Flat commission | a ceding commission that is a fixed percentage of the ceded premiums |
| Profit-sharing commission | a ceding commission that is contingent on the reinsurer realizing a predetermined percentage of excess profit on ceded loss exposures |
| Sliding scale commission | a ceding commission based on a formula that adjusts the commission according to the profitability of the reinsurance agreement. |
| Quota share reinsurance | a type of pro rata reinsurance in which the primary insurer and reinsurer share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) using a fixed percentage. |
| Surplus share reinsurance | a type of pro rata reinsurance in which the policies covered are those whose amount of insurance exceeds a stipulated dollar amount, or line. |
| Variable quota share treaty | a quota share reinsurance treaty in which the cession percentage retention varies based on specified predetermined criteria such as the amount of insurance needed |
| Reinsurance limit | the maximum amount that the reinsurer will pay for a claim and that is commonly stated in the reinsurance agreement. |
| Excess of loss reinsurance (nonproportional reinsurance) | a type of reinsurance in which the primary insurer is indemnified for losses that exceed a specified dollar amount. |
| Attachment point | the dollar amount above which the reinsurer responds to losses |
| Subject premium | the premium the primary insurer charges on its underlying policies and to which a rate is applied to determine the reinsurance premium |
| Per risk excess of loss reinsurance | a type of excess of loss reinsurance that covers property insurance and that applies separately to each loss occurring to each risk |
| Catastrophe excess of loss reinsurance | a type of excess of loss reinsurance that protects the primary insurer from an accumulation of retained losses that arise from a single catastrophic event |
| Co-participation provision | a provision in a reinsurance agreement that requires the primary insurer to retain a specified percentage of the losses that exceed its attachment point |
| Per policy excess of loss reinsurance | a type of excess of loss reinsurance that applies the attachment point and the reinsurance limit separately to each insurance policy issued by the primary insurer regardless of the number of losses occurring under each policy |
| Per occurrence excess of loss reinsurance | a type of excess of loss reinsurance that applies the attachment point and the reinsurance limit to the total losses arising from a single event affecting one or more of the primary insurer's policies |
| Stop loss reinsurance | when the attachment point is stated as a loss ratio in aggregate excess of loss reinsurance |
| Aggregate excess of loss reinsurance | a type of excess of loss reinsurance that covers aggregate losses that exceed the attachment point, stated as a dollar amount of loss or as a loss ratio, and that occur over a specified period, usually one year |
| Finite risk reinsurance | a nontraditional type of reinsurance in which the reinsurer's liability is limited and anticipated investment income is expressly acknowledged as an underwriting component |
| Capital Market | a financial market in which long-term securities are traded |
| Securitization of risk | the use of securities or financial instruments (for example, stocks, bonds, commodities, financial futures) to finance an insurer's exposure to catastrophic loss. |
| Special purpose vehicle (SPV) | a facility established for the purpose of purchasing income-producing assets from an organization, holding title to them, and then using those assets to collateralize securities that will be sold to investors |
| Insurance derivative | financial contract whose value is based on the level of insurable losses that occur during a specific time period |
| Contingent capital arrangement | an agreement, entered into before any losses occur, that enables an organization to raise cash by selling stock or issuing debt at prearranged terms after a loss occurs that exceeds a certain threshold |
| Insurance-linked security | a financial instrument whose value is primarily driven by insurance and/or reinsurance loss events |
| Surplus note | a type of unsecured debt instrument, issued only by insurers, that has characteristics of both conventional equity and debt securities and is classified as policyholders' surplus rather than as a liability on the insurer's statutory balance sheet |
| Strike price | the price at which the stock or commodity underlying a call option (such as a warrant) or put option can be purchased (called) or sold (put) during a specified period |
| Three sources of reinsurance | Professional reinsurers, reinsurance departments of primary insurers, and reinsurance pools, syndicates an assocations |
| A primary insurer purchases reinsurance to | limit it liability for a single loss exposure, for several loss exposures affected by a common event, for loss exposures that aggregate claims over time |
| 4 functions of facultative reinsurance | large-line capacity for loss exposures that exceed the treaty; reduce exposures in geographic areas; insure loss exposures atypical harzard characteristics to maintain favorable treaty loss experience; insure particular classes excluded under the treaty. |
| 2 types of treaty pro rata reinsurance | quota share and surplus share |
| 3 types of treaty excess of loss reinsurance | per risk (per policy), per occurrence (catastrophe), aggregate (excess) |
| 2 types of facultative reinsurance | Pro rata and Excess of Loss |
| Type of reinsurance chosen by newly incorporated insurers or those with limited capital | Pro rata reinsurance |
| Types of Excess of Loss reinsurance | per risk excess of loss reinsurance, catastrophe excess of loss reinsurance, per policy excess of loss reinsurance, per occurrence excess of loss reinsurance, aggregate excess of loss reinsurance |
| Capital market alternatives | Catastrophe bond, catastrophe risk exchange, contingent surplus note, industry loss warrant (ILW), catastrophe option, line of credit, sidecar |
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