Reinsurance Concepts and Applications Flashcards
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What is the primary purpose of reinsurance for a primary insurer?
Answer: To transfer a portion of risk to another insurer to reduce exposure and stabilize results
Reinsurance allows primary insurers to transfer part of their risk to a reinsurer, which stabilizes underwriting results and reduces the financial impact of large or catastrophic losses.
Under a proportional reinsurance treaty, how are premiums and losses shared?
Answer: Premiums and losses are shared in the same proportion as agreed
In proportional (pro-rata) reinsurance, both premiums and losses are shared between the ceding company and the reinsurer in the same agreed proportion.
Which reinsurance structure pays losses only when they exceed the ceding company's retention?
Answer: Excess of loss (XOL) reinsurance
Excess of loss reinsurance is a non-proportional structure where the reinsurer only pays losses that exceed the primary insurer's retained amount (the retention).
In a quota share treaty with a 30% cession rate, if a $500,000 loss occurs, how much does the reinsurer pay?
Answer: $150,000
With a 30% quota share, the reinsurer pays 30% of the loss: 0.30 × $500,000 = $150,000, and the ceding company retains $350,000.
What is a 'ceding commission' in a proportional reinsurance treaty?
Answer: An amount paid by the reinsurer to the ceding company to cover acquisition and overhead costs
A ceding commission is paid by the reinsurer back to the ceding company to reimburse it for acquisition costs (agent commissions) and overhead associated with the ceded business.
What distinguishes facultative reinsurance from treaty reinsurance?
Answer: Facultative covers individual risks negotiated case-by-case; treaty covers a defined portfolio automatically
Facultative reinsurance is negotiated individually for specific risks, giving both parties the option to accept or decline, whereas treaty reinsurance automatically covers all risks within a defined class or portfolio.
An aggregate stop-loss reinsurance contract would most likely be used to protect against which scenario?
Answer: High frequency of small claims leading to adverse aggregate loss ratios
Aggregate stop-loss reinsurance protects the ceding company when the total (aggregate) losses over a period exceed a specified amount, making it ideal for high-frequency, low-severity loss accumulation risk.