Reinsurance Concepts and Applications Flashcards

What is the main difference between per-occurrence XOL and per-risk XOL reinsurance?

Answer: Per-risk applies the retention to each individual insured separately; per-occurrence applies it to the total loss from one event affecting multiple insureds

Per-risk XOL applies the retention and limit to each individual insured risk separately, while per-occurrence XOL applies the retention and limit to the aggregate loss from a single event across all affected policies.

What is a 'sliding scale commission' in proportional reinsurance?

Answer: A commission that increases as the ceded loss ratio improves (decreases)

A sliding scale commission adjusts the ceding commission inversely with the loss ratio: the commission increases when the loss ratio is low (profitable year) and decreases when the loss ratio is high.

In catastrophe reinsurance pricing, what is an 'Annual Exceedance Probability (AEP) curve' used for?

Answer: Determining the probability that aggregate losses in a year will exceed various dollar amounts

The AEP curve shows the probability that total annual losses from all catastrophe events will exceed specified dollar thresholds, and is a key tool in pricing and structuring catastrophe reinsurance.

What is 'retrocession' in the context of reinsurance?

Answer: A reinsurer purchasing reinsurance from another reinsurer for risks it has accepted

Retrocession occurs when a reinsurer (the retrocedant) transfers some of the risk it has assumed to another reinsurer (the retrocessionaire), effectively reinsuring the reinsurer.

Under A.M. Best's analysis of a reinsurance program, which factor would most increase concerns about the ceding company's credit risk from reinsurance recoverables?

Answer: Heavy concentration of recoverables with one low-rated reinsurer

Concentration of reinsurance recoverables with a single low-rated reinsurer creates significant counterparty credit risk, as the ceding company may not collect those funds if the reinsurer becomes insolvent.

What is the 'hours clause' in a catastrophe excess of loss reinsurance treaty?

Answer: A provision that defines the maximum time window within which losses from one event can be aggregated as a single occurrence

The hours clause specifies the continuous time period (e.g., 72 or 168 hours) within which all losses from a catastrophic event can be aggregated and treated as a single occurrence for purposes of the reinsurance limit.

Which statement best describes the concept of 'risk transfer' as it relates to whether a reinsurance contract qualifies for reinsurance accounting treatment under GAAP?

Answer: The reinsurance contract must expose the reinsurer to a reasonable possibility of significant loss for genuine risk transfer to exist

Under FASB ASC 944, a reinsurance contract achieves risk transfer — and thus qualifies for reinsurance accounting — only if it exposes the reinsurer to a reasonable possibility of a significant loss, preventing the use of finite or financial reinsurance to manipulate balance sheets.