Harrison

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Esaie
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26424
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Harrison
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2010-07-12 10:01:01
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  1. 6 Principle Functions of Reinsurance
    • 1. Increase large line capacity
    • 2. Provide catastrophe protection
    • 3. Stabilize loss experience
    • 4. Provide surplus relief
    • 5. Facilitate withdrawal from a market segment
    • 6. Provide underwriting guidance
  2. 4 Functions of Facultative Reinsurance
    • 1. Provide large line capacity for exposures that exceed limits of treaty agreements
    • 2. Reduce the primary's exposure in a given geographic location
    • 3. Insure an exposure with a typical hazard characteristics
    • 4. Insure particular classes of exposures that are excluded under treaty reinsurance
  3. Treaty vs. Facultative Reinsurance
    • 1. Treaty:
    • a) Reinsurance of an entire class or portfolio of loss exposures
    • b) Obligatory: all of primary's individual loss exposures that fall within the treaty are automatically reinsured
    • 2. Facultative:
    • a) Reinsurance of individual loss exposures
    • b) Primary insurer chooses which exposures to submit to reinsurer
    • c) Non-Obligatory: Reinsurer can accept or reject any loss exposure submitted
  4. 2 Hybrids of Treaty & Facultative Reinsurance
    • 1. Facultative Treaty
    • a) Used when a class of business has insufficient loss exposures to justify treaty reinsurance
    • b) Has sufficient number of loss exposures to determine the details of future individual placements
    • 2. Facultative Obligatory Treaty
    • a) Primary has option of ceding, but reinsurer is obligated to accept
  5. 3 Reinsurance Professional and Trade Associations
    • 1. Intermediaries and Reinsurance Underwriters Association (IRU)
    • a) Publishes Journal of Reinsurance which discusses concepts and research aff ecting market
    • b) Conducts claims seminars and conferences
    • 2. Brokers & Reinsurers Markets Association (BRMA)
    • a) Described as a forum for treaty reinsurance professionals
    • b) Seeks to identify and address industry-wide operational issues (e.g., contract wording)
    • 3. Reinsurance Association of America (RAA)
    • a) Provides information on reinsurance issues to interested parties outside the industry
    • b) Analyzes aggregate data and conducts seminars
  6. 4 Factors A Primary Insurer Should Consider When Determining a Line on a Single Loss Exposure
    • 1. Maximum amount of insurance or limit of liability allowed by insurance regulations
    • 2. Size of potential loss or losses that can be retained without impairing insurer's earnings or surplus
    • 3. Specifi c characteristics of a particular loss exposure (e.g.,property attributes)
    • 4. Amount, types, and cost of available reinsurance
  7. 3 Ways Reinsurance Can Stabilize Loss Experience
    • 1. Limit liability for a single loss exposure
    • 2. Limit liability for several loss exposures aff ected by a common event
    • 3. Limit liability for loss exposures that aggregate claims overtime
  8. Novation vs. Portfolio Reinsurance
    • 1. Novation
    • a) Completely eliminates liabilities of the primary insurer
    • 2. Portfolio Reinsurance
    • a) Primary is still responsible for paying claims, but gets reimbursed by reinsurer
  9. 3 Options a Primary Insurer May Have When It Decides To Withdraw From A Market
    • 1. Stop selling new policies and continue insurance until all policies expire (runoff )
    • 2. Cancel all policies (if regulations permit), and refund unearned premiums to insureds
    • 3. Withdraw from market segment by purchasing portfolio reinsurance
  10. 3 Common Types of Ceding Commissions in Reinsurance
    • 1. Flat commission is a ceding commission that is a fi xed percentage of the ceded premiums
    • 2. Pro fit-sharing commission: is a ceding commission that is contingent on the reinsurer realizing a predetermined percentage of excess profi t on ceded loss exposures
    • 3. Sliding scale commission is a ceding commission based on a formula that adjusts the commission according to the pro tability of the reinsurance agreement
  11. 7 Characteristics of Finite Reinsurance
    • 1. Limited transfer of insurance risk to the reinsurer
    • 2. Anticipated investment income is expressly acknowledged as an underwriting component
    • 3. Used with a combo of traditionally insurable and traditionally uninsurable loss exposures
    • 4. Usually provided for a multi-year term
    • 5. Reinsurer premium can be a substantial percentage of there insurance limit
    • 6. Designed to cover high severity losses
    • 7. Reinsurer commonly shares profi ts with the primary isnurer when it has favorable loss experience
  12. 2 Ways of Treating Loss Adjustment Expenses in Reinsurance
    • 1. Pro-rata in Addition
    • a) Prorate expenses between the primary and the reinsurer based on same percentage share that each is responsible for the loss
    • 2. Included in the limit
    • a) Add the expenses to the amount of loss when applying the attachment point
  13. Working Cover
    • 1. De finition: an excess of loss reinsurance agreement with alow attachment point
    • 2. Characteristics:
    • a) Enables primary insurer to spread losses over several years (profi table will o ffset unprofi table)
    • b) Primary uses when selling line with little expertise until they better understand
    • c) Usually require occurence limitation to prevent working cover from being exposed to catastrophic events
  14. Co-Participation Provision
    • 1. De finition: Provision that requires the primary insurer to retain a specifi ed percentage of the losses that exceed its attachment point
    • 2. Purpose: Provides primary with fi nancial incentive to efficiently manage losses that exceed attachment point
  15. 5 Types of Excess of Loss Reinsurance
    • 1. Per Risk Excess of Loss - Covers property insurance and applies separately to each loss occurring to each risk
    • 2. Catastrophe Excess of Loss - Protects primary insurer from an accumulation of retained losses arising from single catastrophic event
    • 3. Per Policy Excess of Loss - Applies the attachment point and the reinsurance limit separately to each policy issued by the primary regardless of number of losses per policy
    • 4. Per Occurrence Excess of Loss - Applies the attachment point and the reinsurance limit the total losses arising from a single event aff ecting 1 or more of the primary's policies
    • 5. Aggregate Excess of Loss - Covers aggregated losses that exceed the attachment point and occur over a stated period
  16. Clash Cover
    • 1. De finition: Type of per occurrence XOL reinsurance for liability loss exposure that protects the primary against aggregations of losses from one occurrence that a ffects several insureds or several types of insurance
    • 2. Characteristics:
    • a) Can combine coverage for several lines of business
    • b) Has high attachment point
    • c) Retention is not in addition to the retention of other applicable per occurrence XOL reinsurance
  17. 4 Basis of Attachment For Reinsurance Policies
    • 1. Risks attaching basis - covers policies issued or renewed by the primary insurer on or after the reinsurance treaty's eff ective date
    • 2. Losses occurring basis - covers the unearned portion of policies in force as well as policies issued or renewed by the primary insurer on or after the reinsurance treaty's eff ective date
    • 3. Policies issued basis - convers only new policies issued on or after the reinsurance treaty's eff ective date
    • 4. In-force policies basis - covers only the unearned portion of in-force policies
  18. Properties of Insolvency Clause
    • 1. States that the reinsurer agrees to pay its reinsurance obligations if the primary insurer becomes insolvent, whether or not the primary insurer has paid its obligations to the underlying policyholders
    • 2. Without diminution - reinsurer must pay full value of claims under the treaty
    • 3. Liquidator must notify reinsurer of a pending claim so reinsuer has time to investigate
    • 4. Reinsurer has right at own expense to defend a claim
    • 5. With court approval, reinsuer's expenses to investigate and settle a claim can be wholly or partially reimbursable by the insolvent primary insurer
  19. 4 Reasons to Modify Exposure Rated Excess Loss Premium for Property Per Risk Excess of Loss Treaty
    • 1. Adequacy of underlying premiums
    • 2. Composition of policies subject to the treaty and their deductibles
    • 3. Quality of the primary's underwriting
    • 4. Loading for the reinsurer's expenses
  20. 2 Functions of Property Per Risk Excess of Loss Reinsurance
    • 1. Increase large line capacity
    • 2. Stabilize loss experience
  21. 4 Steps of Experience Rating
    • 1. Collect the required data
    • 2. Trend losses
    • 3. Develop the experience rate
    • 4. Price the unused portion of the layer
  22. 7 Clauses Designed or Adapted for Property Per Risk Excess of Loss
    Treaties
    • 1. Retention and limits clause
    • 2. Loss notices and settlements clause
    • 3. Reinsurance premium clause
    • 4. Net retained lines clause
    • 5. Ultimate net loss clause
    • 6. Pools, Associations, and Syndicates Exclusion Clause
    • 7. Total Insurance Value Exclusion Clause
  23. 5 Characteristics of Property Per Risk Excess of Loss Treaties
    • 1. Used to protect against adverse financial consequences of large losses
    • 2. Often purchased in layers so primary can obtain needed underwriting capacity
    • 3. May only cover one type of insurance and only selected causes of loss
    • 4. May contain exclusions that do not appear in the underlying insurance policies
    • 5. Easier to administer than surplus share
  24. 2 Characteristics of Flat Rate Covers
    • 1. Fixed rate that is not adjusted for losses occurring under the reinsurance treaty and that is applied to the primary's prospective premiums
    • 2. Amount of ultimate reinsurance premium determined once primary's final actual subject premium becomes known
  25. Characteristics of Loss Rated Cover
    • 1. Loss Rate: Rate that is determined from the actual losses sustained under a reinsurance treaty
    • 2. Usually has 3 rates: a provisional, a minimum, and a maximum rate
    • 3. Provisional rate is generally set close to reinsurance rate for latest treaty term or loss cost rate after loadings
    • 4. Rate is adjusted retrospectively based on the loss experience actually realized during the treaty term
    • 5. Retro rate adjustment includes a provision for the reinsurer's profi t, expenses, and contingencies, subject to the maximum and minimum rates
  26. Loss Notices and Settlements Clause
    Requires the primary insurer to notify the reinsurer of any loss amount that exceeds or is likely to exceed the primary insurer's retention
  27. Pools, Associations, and Syndicates Exclusion Clause
    • 1. Excludes from coverage any liability emanating from the primary's participation directly or indirectly, through pools, associations, and syndicates
    • 2. Exluded in order to control reinsurers accumulation of pool liabilities since they already participate in many
  28. Total Insurance Value Exclusion Clause
    • 1. Excludes very large loss exposures from automatic coverage
    • 2. Exceptions, including if the loss is 100% insured by the primary
  29. Loss Rated Cover
    • 1. Rate that is determined from the actual losses sustained under a reinsurance treaty
    • 2. Generally set close to reinsurance rate for latest treaty term or loss cost rate after loadings
    • 3. Adjusted retrospectively based on the loss experience actually realized during the treaty term
    • 4. Retro rate adjustment includes a provision for the reinsurer's pro fit, expenses, and contingencies, subject to the maximum and minimum rates
  30. 3 Functions of Casualty Excess of Loss Treaties
    • 1. Increase Large Line Capacity - Helps primary compete by allowing them to write higher limits
    • 2. Stabilize Loss Experience - Reduce fluctuation in experience which aids in financial planning, supports growth, and strengthens investors' confi dence
    • 3. Provide Catastrophe Protection - Protects primary's earnings and surplus
  31. 3 Features of Claims-Made Policies
    • 1. Retroactive date - Date on or after which BI or PD must occur in order to becovered
    • 2. Prior acts coverage - Extension of coverage for claims that would otherwise not be covered because they occurred prior to the retroactive date of the current claims-made policy
    • 3. Extended reporting period - Additional period following the expiration of a C-M policyduring which the expired policy covers claims made against the insured, provided the injury occurred on or after the retroactive date and before policy expiration
  32. Reinstatement Clause For Casualty Excess of Loss Treaties
    1. Reinstates treaty's original per occurrence limit after a loss occurrence for a predetermined premium, subject to a maximum recovery for the contract year
  33. Sunset and Sunrise Clauses
    • 1. Sunset clause - limits the time after the treaty's expiration during which occurrences can be reported to the reinsurer
    • 2. Sunrise clause - restores the coverage lost because of the operation of a sunset clause
  34. Commutation Clause
    • 1. Allows primary and reinsurer to close out liability for claims under the treaty after a stated time period from treaty expiration
    • 2. Establishes earliest point at which a commutation request can be made
    • 3. Defi nes how actuary or appraiser can determine ultimate costs and whether recommendation is binding
  35. Clauses Designed or Adapted For Casualty Excess of Loss Treaties
    • 1. Retention and limits clause
    • 2. Reinstatement clause
    • 3. Claims and loss adjustment expense clause
    • 4. Declaratory judgment expense clause
    • 5. Sunset and sunrise clauses
    • 6. Commutation clause
  36. 3 Considerations for Exposure Rates
    • 1. Accuracy and credibility of projected distribution of subject premium by policy limits
    • 2. Accuracy of ILF in excess of retention
    • 3. Possible LAE, ECO, XPL, and Clash not contemplated by ILF
  37. 5 Considerations for Experience Rates
    • 1. Accuracy of estimates of claims cost inflation trend
    • 2. Accuracy of estimates of excess loss development
    • 3. Accuracy of current value of subject premium
    • 4. Adequacy of statistical sampling
    • 5. Stability of estimated excess loss costs
  38. 3 Areas Addressed By Claims & LAE Clause
    • 1. Reporting claims
    • 2. Binding the reinsurer to the primary insurer's settlement
    • 3. Sharing loss adjustment expenses (pro-rate or included in loss)
  39. Arguments Supporting Coverage for Declaratory Judgment Expenses When Treaty Does Not Include a Declaratory Judgment Expense Clause
    • 1. Declaratory judgment expenses are like any other claim related loss adjustment expense
    • 2. Reinsurer bene fits from successful declaratory judgment actions
    • 3. "Follow the fortunes" doctrines requires coverage for declaratory judgment expenses
  40. Arguments Against Coverage for Declaratory Judgment Expenses When Treaty Does Not Include a Declaratory Judgment Expense Clause
    • 1. Not the result of claim handling but of an adversarial proceeding and therefore not LAE
    • 2. Treaty does not explicitly state that expenses are covered
    • 3. "Follow the fortunes" doctine cannot create coverage where none exists
  41. 5 Factors That Modify The Reinsurance Rate When Exposure Rating is Used to Price Casualty XOL Treaties
    • 1. Allocated loss adjustment expenses
    • 2. Reinsurer's expenses
    • 3. Extra contractual obligations
    • 4. Clash cover
    • 5. Policy limit mix
  42. 4 Functions of Catastrophe Reinsurance
    • 1. Provide catastrophe protection
    • 2. Limit financial consequences of catastrophic events
    • 3. Primary can limit losses to a predetermined retention per loss occurrence which stabilizes loss experience
    • 4. Help avoid large fluctuations in earnings per share and wide swings in pro fits and losses
  43. Reinstatement Clause For Catastrophe Treaties
    • 1. Provides for an automatic reinstatement of the reinsurance limit
    • 2. Typically only one reinstatement - immediate and mandatory
    • 3. Typically reinsurer charges a pro rata amount of the original reinsurance premium
  44. Considerations for Catastrophe Treaties
    • 1. Attachment point
    • 2. Layers and limits
    • 3. Underlying insurance analysis
    • 4. Inuring reinsurance
    • 5. Payback of prior losses
    • 6. Reinsurance limit
  45. Payback Period vs. Rate on Line (ROL)
    • 1. 'Payback Period' and 'Rate on Line' are inverses
    • 2. Payback period is the number of years a treaty needs to continue at the present reinsurance premium for the reinsurer to recoup the payment of the reinsurance limit under the treaty
    • a) Fomula: Payback period = Reinsurance limit / Reinsurance premium paid
    • 3. Rate on line is a measure of the appropriateness of the reinsurance premium relative to the reinsurance limit
    • a) Formula: ROL = Reinsurance Premium Paid / Reinsurance Limit
  46. 4 Alternatives to Traditional Catastrophe Reinsurance
    • 1. Lines of Credit
    • 2. Catastrophe Bonds
    • 3. Catastrophe Options
    • 4. Catastrophe Risk Exchanges
  47. Uses of Catastrophe Models in Reinsurance
    • 1. Primaries use cat models to
    • a) Analyze the cat exposure
    • b) Develop marketing plans
    • c) Establish underwriting acceptability of individual loss exposures

    • 2. Reinsurers use cat models to
    • a) Determine how program will respond under various cat scenarioes
    • b) Establish rates for cat coverage
    • c) Manage cat exposure reinsurers have assumed
    • d) Aid in determining cat retrocessional needs
  48. 2 Key Outputs of Catastrophe Modeling
    • 1. Probably maximum loss (PML)
    • a) the amount of loss expected
    • 2. Average annual loss (AAL)
    • a) long-term average loss expected in any one year that represents
  49. 4 Issues Associated With Use of Catastrophe Modeling
    • 1. Cat models typically do not rely heavily on historical losses
    • 2. Di fferent models produce diff erent outcomes because of variation in assumptions in models
    • 3. Cat models place signi cant demands on primary's information systems
    • 4. Difficult to evaluate because developers unlikely to share proprietary information

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