CPCU 520: Insurance Operations 2nd Edition/Chapter 8: Reinsurance Principles and Concepts

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CPCU 520: Insurance Operations 2nd Edition/Chapter 8: Reinsurance Principles and Concepts
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  1. Reinsurance
    The transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium, to indemnify another insurer (the primary insurer) for some, or all of the financial consequences of certain loss exposures covered by the primary's insurance policies.
  2. Primary insurer
    In reinsurance, the insurer that transfers or cedes all or part of the insurance risk it has assumed to another insurer in a contractual agreement.
  3. 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.
  4. Reinsurance agreement
    Contract between the primary insurer and reinsurer that stipulates the form of reinsurance and the type of accounts to be reinsured.
  5. Insurance risk
    Uncertainty about the adequacy of insurance premiums to pay losses.
  6. Retention
    The amount retained by the primary insurer in the reinsurance transaction.
  7. Reinsurance premium
    The consideration paid by the primary insurer to the reinsurer for assuming some or all of the primary insurer's insurance risk.
  8. Ceding commission
    An amount paid by the reinsurer to the primary insurer to cover part or all of the primary insurer's policy acquisition expenses.
  9. Retrocession
    A reinsurance agreement whereby one reinsurer (the retrocedant) transfers all or part of the reinsurance risk it has assumed or will assume to another reinsurer (the retrocessionaire).
  10. Retrocedant
    The reinsurer that transfers or cedes all or part of the insurance risk it has assumed to another reinsurer.
  11. Retrocessionaire
    The reinsurer that assumes all or part of the reinsurance risk accepted by another reinsurer
  12. 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.
  13. Line
    The maximum amount of insurance or limit of liability that an insurer will accept on a single loss exposure.
  14. Surplus relief
    A replenishment of policyholder's surplus provided by the ceding commission paid to the primary insurer by the reinsurer.
  15. 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.
  16. Novation
    An agreement under which one insurer or reinsurer is substituted for another.
  17. Professional reinsurer
    An insurer whose primary business purpose is serving other insurer's reinsurance needs.
  18. Direct writing reinsurer
    A professional reinsurer whose employees deal directly with primary insurers.
  19. 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.
  20. Reinsurance pools, syndicates, and associations
    Groups of insurers that share the loss exposures of the group, usually through reinsurance.
  21. 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.
  22. 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 premiums, losses, expenses, and profits.
  23. Association
    An organization of member companies that reinsure by fixed percentage the total amount of insurance appearing on policies issued by the organization.
  24. Adverse selection
    The decision to reinsure those loss exposures that have an increased probability of loss because the retention of those loss exposures is undesirable.
  25. Facultative certificate of reinsurance
    Sn agreement that defines the terms of the facultative reinsurance coverage on a specific loss exposure.
  26. 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).
  27. Flat commission
    A ceding commission that is a fixed percentage of the ceded premiums.
  28. Profit-sharing commission
    A ceding commission that is contingent on the reinsurer realizing a predetermined percentage of excess profit on ceded loss exposures.
  29. Sliding scale commission
    A ceding commission based on a formula that adjusts the commission according to the profitability of the reinsurance agreement.
  30. Quota share reinsurance
    A type of pro rata reinsurance in which the primary insurer and the reinsurer share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) using a fixed percentage.
  31. Variable quota share treaty
    A quote share reinsurance treaty in which the cession percentage retention varies based on specified predetermined criteria such as the amount of insurance needed.
  32. Loss ratio
    A ratio that measures losses and loss adjustment expenses against earned premiums and that reflects the percentage of premiums being consumed by losses.
  33. 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.
  34. Reinsurance limit
    The maximum amount that the reinsurer will pay for a claim and that is commonly stated in the reinsurance agreement.
  35. 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.
  36. Attachment point
    The dollar amount above which the reinsurer responds to losses.
  37. Subject premium
    The premium the primary insurer charges on its underlying policies and to which a rate is applied to determine the reinsurance program.
  38. Working cover
    An excess of loss reinsurance agreement with a low attachment point.
  39. Per risk excess of loss insurance
    A type of excess of loss reinsurance that covers property insurance and that applies separately to each loss occurring to each risk.
  40. Catastrophe excess of loss reinsurance
    A type of excess loss reinsurance that protects the primary insurer from an accumulation of retained losses that arise from a single catastrophic event.
  41. 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.
  42. 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.
  43. Per occurrence excess of loss reinsurance
    A type of excess of loss reinsurance that applies the attachment point and reinsurance limit to the total losses arising from a single event affecting one or more of the primary insurer’s policies.
  44. Aggregate excess of loss reinsurance
    A type of excess of loss reinsurance that covers aggregated 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.
  45. Finite risk reinsurance
    A nontraditional type of reinsurance in which the reinsurer's liability is limited and anticipated investment income is express acknowledged as an underwriting component.
  46. Capital market
    A financial market in which long-term securities are traded.
  47. Securitization of risk
    The use of securities or financial instruments (for example, stocks, bonds, commodites, financial futures) to finance an insurer's exposure to catastrophic loss.
  48. Special purpose vehicle (SPV)
    A facility established for the purpose of purcvhasing income-producing assets from an organiation, holding title to them, and then using those assets to collateralize secuties that will be sold to investors.
  49. Insurance derivative
    Financial contract whose valuer is based on the level of insurable losses that occur during a specific time period.
  50. 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.
  51. Insurance-linked security
    A financial instrument whose value is primarily driven by insurance and/or reinsurance loss events.
  52. Surplus note
    A type of unsecured debt insruement, issued only by insurers, that has characteristics of both conventional equity and debt securities and is classified as policyholder's surplus rather than as a liability on the insurers statutory balance sheet.
  53. Strike price
    The price at which the stock or commodity underlying a call options (such as a warrant) or a put option can be pourchased (called) or sold (put) during a specified period.
  54. Reinsurance program
    The combination of reinsurance agreements that a primary insurer purchases top meet its reinsurance needs.
  55. Underwriting risk
    A measure of the loss volatility of the types of insurance sold by an insurer.

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