PGI Reinsurance 2 — Questions and Answers
Question 1: What is 'retrocession' in reinsurance?
- The act of cancelling a reinsurance treaty
- When a reinsurer passes on part of the risk it has accepted from a cedant to another reinsurer (the retrocessionnaire) (Correct answer)
- When a cedant cancels its reinsurance and retains all risks
- The reinsurer returning premiums to the cedant
Correct answer: When a reinsurer passes on part of the risk it has accepted from a cedant to another reinsurer (the retrocessionnaire)
Retrocession is when a reinsurer purchases reinsurance for itself from another reinsurer (the retrocessionnaire), passing on part of the risk it has assumed from its cedants. It is essentially reinsurance of reinsurance.
Question 2: What is 'loss reserve development' and why is it important in reinsurance?
- The growth in premium reserves over time
- The process by which initial estimates of claims costs change over time as actual costs become clearer, affecting reinsurance recoveries (Correct answer)
- Development of new reinsurance products
- Changes in investment returns on reserves
Correct answer: The process by which initial estimates of claims costs change over time as actual costs become clearer, affecting reinsurance recoveries
Loss reserve development refers to how initial claims estimates change as additional information emerges, claims develop, or legal proceedings conclude. In long-tail reinsurance, reserve development can significantly affect the actual reinsurance recoveries eventually received.
Question 3: What is the 'follow the fortunes' doctrine in reinsurance?
- The reinsurer follows the cedant to any new insurance markets
- The reinsurer is bound by the cedant's good faith claims decisions and must pay its share of agreed losses without independent review (Correct answer)
- The cedant must follow the reinsurer's underwriting guidelines
- Both parties follow Singapore insurance market conventions
Correct answer: The reinsurer is bound by the cedant's good faith claims decisions and must pay its share of agreed losses without independent review
The 'follow the fortunes' doctrine means the reinsurer shares the cedant's fate and is bound by the cedant's bona fide business decisions on claims settlement, subject to the cedant acting in good faith within the terms of the original policy.
Question 4: What is 'finite reinsurance' and why has it attracted regulatory scrutiny?
- Reinsurance with a fixed number of covered events
- A form of reinsurance with limited risk transfer, often used for financial engineering purposes, which regulators scrutinize to ensure genuine risk is transferred (Correct answer)
- Reinsurance that expires after a fixed period
- Reinsurance covering only finite-value assets
Correct answer: A form of reinsurance with limited risk transfer, often used for financial engineering purposes, which regulators scrutinize to ensure genuine risk is transferred
Finite reinsurance involves limited risk transfer and often has significant financial engineering components. Regulators have scrutinized it to ensure genuine insurance risk is transferred, rather than being used purely to smooth accounting results.
Question 5: What is 'aggregate extension clause' in a catastrophe reinsurance treaty?
- A clause extending the treaty to cover more countries
- A clause that allows losses from multiple smaller events to be aggregated to satisfy the excess point of a catastrophe treaty (Correct answer)
- A clause allowing premium to be paid in instalments
- A clause extending the treaty for additional premium
Correct answer: A clause that allows losses from multiple smaller events to be aggregated to satisfy the excess point of a catastrophe treaty
An aggregate extension clause allows the cedant to aggregate losses from multiple smaller events occurring within a specified timeframe to satisfy the attachment point of the catastrophe excess of loss treaty.
Question 6: What is 'premium cession timing' and why does it matter in proportional reinsurance?
- Different names for the same calculation method
- Whether premiums and losses are shared as written, earned, or on an actual basis — affecting cash flow timing between cedant and reinsurer (Correct answer)
- Premium cession applies to quota share; loss cession applies only to surplus treaties
- These are different countries' approaches to proportional reinsurance
Correct answer: Whether premiums and losses are shared as written, earned, or on an actual basis — affecting cash flow timing between cedant and reinsurer
In proportional reinsurance, the timing basis determines when premiums and losses are shared — whether on written premium, earned premium, or actual losses paid. The basis affects cash flows between cedant and reinsurer and reporting obligations.
PGI Reinsurance 2
What is 'retrocession' in reinsurance?