20931562 Re Insurance Concepts

Reinsurance Concepts

What Is ReinsuranceWhat Is Reinsurance

Reinsurance is a transaction where by one insurance company (the Reinsurance is a transaction where by one insurance company (the

“reinsurer”) agrees to indemnify another insurance company (the “reinsurer”) agrees to indemnify another insurance company (the

“ceding” or “primary” company) against all or part of the loss that “ceding” or “primary” company) against all or part of the loss that

the latter sustains under a policy or policies that it has issued. For the latter sustains under a policy or policies that it has issued. For

this service, the ceding company pays the reinsurer a premiumthis service, the ceding company pays the reinsurer a premium..

Insurance Vs Insurance Vs ReinsuranceReinsurance

InsuranceInsurance

• Contract between an insurer

& a member of the public

• Insurer deals with the

insured

• Subject matter of insurance

is property, person, benefits

or potential legal liability

ReinsuranceReinsurance

• Contract between two

insuring organizations

• Reinsurer deals with the

insurer

• Subject matter of reinsurance

is defined portion of ceding

company’s contractual

liability

Functions Of ReinsuranceFunctions Of Reinsurance

• CAPACITY CAPACITY : Allows the reinsured to write larger amounts of

insurance.

• CATASTROPHE :CATASTROPHE : Protects the reinsured against a single,

catastrophic loss or multiple large losses.

• STABILIZATION :STABILIZATION : Helps smooth the reinsured’s overall operating

results from year to year.

• FINANCIAL :FINANCIAL : Eases the strain on the reinsured’s surplus during

rapid premium growth.

• WITHDRAWAL :WITHDRAWAL : Provides a means for the reinsured to withdraw from

a line of business or geographic area or production source.

• MARKET ENTRANCE :MARKET ENTRANCE : Helps the reinsured spread the risk on new

lines of business until premium volume reaches a certain point of

maturity; can add confidence when in unfamiliar coverage areas.

• EXPERTISE :EXPERTISE : Provides the reinsured with a source of underwriting

information when entering a new line of insurance or a new market.

Functions Of Functions Of ReinsuranceReinsurance

Who Writes ReinsuranceWho Writes Reinsurance• DIRECT WRITERS :DIRECT WRITERS : From reinsurance relationships directly with the ceding

company.

• BROKER-MARKET REINSURERS :BROKER-MARKET REINSURERS : Assume business through reinsurance

brokers (“intermediaries”) who provide the production or sales support. The

broker negotiates and purchases the reinsurance protection on behalf of the

primary company, and receives a brokerage commission from the assuming

reinsurance companies used by the intermediary.

• REINSURANCE DEPARTMENTS :REINSURANCE DEPARTMENTS : Primary company’s professional

reinsurance department that assumes reinsurance business.

• CEDE :CEDE : to transfer part of the risk to another insurer

• CEDING COMPANY :CEDING COMPANY : the company that transfers or cedes risks to

another company.

• ACQUISITION COSTS :ACQUISITION COSTS : all expenses incurred by an insurance or

reinsurance company that are directly related to acquiring insurance

accounts (insured, or reinsured) for the company.

• ASSUME :ASSUME : to accept all or part of ceding company’s insurance or

reinsurance on a risk or exposure.

• BINDER :BINDER : A record of reinsurance arrangements pending the issuance

of a formal reinsurance contract (which then replaces the binder)

Reinsurance TermsReinsurance Terms

• BORDEREAU :BORDEREAU : A form providing premium or loss data with respect to

identified specific risks which is furnished the reinsurer by the reinsured

• BURNING COST :BURNING COST : The ration of actual past reinsured losses to the

ceding company’s subject matter premium (written or earned) for the

same period; used to analyze past reinsurance experience or to project

future reinsurance experience.

• RETROCESSIONNAIRE :RETROCESSIONNAIRE : The assuming reinsurer in a retrocession,

where the ceding reinsurer is known as the retrocedent


• CONTINGENCY COVER :CONTINGENCY COVER : Reinsurance protection against the unusual

combination of losses.

• PREMIUM (Written/Unearned/Earned):PREMIUM (Written/Unearned/Earned): Written premium is premium

registered on the books of an insurer or reinsurer at the time a policy is

issued and paid for. Premium for a future exposure period is said to be

unearned premium for an individual policy, written premium minus

unearned premium equals earned premium. Earned premium is income

for the accounting period, while unearned premium will be income in a

future accounting period



• LOSSESLOSSES

Outstanding : Losses (reported or not reported) that have occurred but

have not been paid

Paid : The amounts paid to claimants as insurance claim settlements.

Incurred : In insurance accounting, an amount representing the losses

paid plus the change (positive or negative) in outstanding loss reserves

within a given period of time

• POOL :POOL : Any joint underwriting operation of insurance or reinsurance in

which the participants assume a predetermined and fixed interest in all

business written.

• FRONTING :FRONTING : An arrangement whereby one insurer issues a policy on a

risk for, and at the request of, one or more other insurers with the intent

of passing the entire risk by way of reinsurance to the other insurer(s).

Such an arrangement may be illegal if the purpose is to frustrate

regulatory requirements.

• SYNDICATE :SYNDICATE : An association of individuals or organizations to pursue

certain insurance objectives. For example, individual underwriters in

Lloyd’s of London associate in separate syndicates to write marine

insurance, reinsurance life insurance, etc., entrusting the administrative

details of each syndicate to a syndicate manager.


Reinsurance WorkingReinsurance Working

Insured

Insurer(Ceding Company)

Reinsurer

Retrocessionnaire

InsuranceInsurance

ReinsuranceReinsurance

RetrocessionRetrocession

• Insurance CompaniesInsurance Companies

• ReinsurersReinsurers

• Reinsurance PoolsReinsurance Pools

• Lloyd'sLloyd's

• Self-InsurersSelf-Insurers

Reinsurance Reinsurance OrganizationOrganization

Type of ReinsuranceType of Reinsurance

Facultative Treaty

Pro Rata Excess Of Loss

Quota Share

Surplus Share

Per Risk

Per Occurrence

Aggregate Excess Of Loss

Per Risk Excess Of Loss

Per Risk Aggregate

Excess Of Loss

FACULTATIVEFACULTATIVE TREATYTREATY

Reinsurance transacted on an individual risk basis.Reinsurance transacted on an individual risk basis.

The ceding company has the option to offer an individualThe ceding company has the option to offer an individual

risk to the reinsurer and the reinsurer retains the right torisk to the reinsurer and the reinsurer retains the right to

accept or reject the riskaccept or reject the risk

Facultative Facultative ReinsuranceReinsurance

Treaty ReinsuranceTreaty Reinsurance

A transaction encompassing a block of the cedingA transaction encompassing a block of the ceding

company’s book of business. The reinsurer must company’s book of business. The reinsurer must

accept all business included within the terms of the accept all business included within the terms of the

reinsurance contractreinsurance contract

Treaty vs. Facultative ReinsuranceTreaty vs. Facultative Reinsurance

• Formal agreement for a certain

line of business

• Participates in all risks within

the treaty

• Involves less paper work

• Insurers have to cede even if

they can retain

• Obligatory acceptance by the

reinsurer of covered business

• Separate contract for each

policy

• Does not participate in all risk

• Involves more paper work

• Insurer has choice to retain a

risk completely

• Righty to accept or reject

each risk on its own merit

Treaty Facultative Treaty Facultative

Reinsurance AgreementsReinsurance AgreementsPro Rata

A term describing all forms of quota share and surplus reinsurance in which the reinsurer shares the same proportion of the premium and losses of the ceding company. This also is called a “Proportional” agreement.

Advantages Advantages •Good protection against frequency/severity potential

•Protection of net retention on first-dollar basis

•Permits recovery on smaller losses

40% Net60% Rein

40% Net60% Rein

Premium

=

Losses

Reinsurance AgreementsReinsurance AgreementsPro Rata

Quota ShareQuota Share

The Ceding Company cedes a fixed percentage of each policy written in a defined line of business to the reinsurer

Surplus ShareSurplus Share

The Ceding Company sets a unique retention amount for each type of risk to be reinsured under the treaty

Reinsurance AgreementsReinsurance AgreementsExcess of Loss

A term describing a reinsurance transaction that, subject to a specified limit, indemnifies a ceding company against the amount of loss in excess of a specified retention.Advantages Advantages •Good protection against frequency/severity potential,depending upon the retention size

•Allows a greater net premium retention

•More economical in terms of reinsurance premium and cost of administration

Reinsurer $Negotiated Reinsurer $

Excess of Retention

Retention ofPrimary Company

Reinsurance AgreementsReinsurance AgreementsExcess of Loss

Per-Risk Excess of LossPer-Risk Excess of LossReinsurer participates in excess of a predetermined amount for each risk

Per-Risk Aggregate Excess of LossPer-Risk Aggregate Excess of LossReinsurer participates over aggregate claims for a risk in a specified period of time

Per-Occurrence Excess of LossPer-Occurrence Excess of LossReinsurer participates over a predetermined amount for all losses arising out of one event or occurrence, irrespective of the number of risks involved

Aggregate Excess of LossAggregate Excess of LossReinsurer participates over a predetermined aggregate limit of loss for a collection of risk over a specified period of time

Rank Group Or CompanyNet Premium Written

(in Million $)

1 Swiss Re 13,375.00

2 Munich Re 12,138.00

3 Employers Reinsurance Corporation 8,239.00

4 General Cologne Re 7,717.00

5 Lloyd's 3,806.00

Top Leading Top Leading CompaniesCompanies

As of September 2000 : Source by

AAR REINSURANCE ASSOCIATION OF AMERICAReinsurance Underwriting Report

Rank Group Or CompanyNet Premium Written

(in Million $)

1 General Re Group 3,959.69

2 Employers Reinsurance Corporation 3,706.70

3 American Re 2,761.56

4 Transatlantic/ Putnam Reinsurance Co. 1,764.10

5 Swiss Reinsurance America Corporation 1,647.18

6 St. Paul Re 1,494.38

7 Everest Reinsurance Company 1,360.65

8 Berkshire Hathaway Reinsurance Group 1,216.51

As of 31 December 2001 : Statutory Results by RAA on 21 March 2002

Thank You

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20931562 Re Insurance Concepts