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Exam 3 Vocabhttp://quizlet.com/17301384/rmi-4292-exam-3-vocab-flash-cards/Chapter 10- Briefly define reinsurance. o Reinsurance is the transfer from one insurer to another of some or all of the financial consequences of certain loss exposures covered by the primary insurer's policies.- What is the purpose of a retrocession? o Under a retrocession, one reinsurer, the retrocedent, transfers all or part of the reinsurance risk that it has assumed or will assume to another reinsurer, the retrocessionaire.- What are some of the practical business goals that reinsurance can help an insurerachieve? o Reinsurance helps an insurer achieve several practical business goals, such as insuring large exposures, protecting policyholders' surplus from adverse loss experience, and financing the insurer's growth.- What are the six principal functions that reinsurance performs for primary insurers?o Although several of its uses overlap, reinsurance is a valuable tool that can perform six principal functions for primary insurers:  • Increase large-line capacity - this allows the primary insurer to take on more significant risks than its financial condition and regulation otherwise permit. - Reinsurers give primary insurance a way by accepting liability forlosses that the primary insurer is unwilling or unable to retain- This also allows them to increases their market share while limiting financial consequences of potential losses • Provide catastrophe protection - without reinsurance catastrophes will reduce the primary insureds earnings or may cause them to become insolvent if a large number of insured loss exposures are concentrated in a area.- It also protects against the financial consequences of a single catastrophic event that can cause many losses in a area • Stabilize loss experience - volatility in an insurance company can have many reprocussions like reduction in ratings, decrease in stock prices, and sometimesinsolvency- reinsurance can smooth the resulting peaks and valleys in a insurer’s loss experience curve- it also encourages capital investment because investors are more likely to invest in a company who is financially stable • Provide surplus relief - if the insurer is growing a lot then their may have a problem keeping a capacity ratio that is desirable by the company.o This is because they now have to account for expenses to get new policies they can get a decrease in their policy holders surplus since by law they have to accept losses at the time a policy is made and the revenues are added in over the life of the policy • Facilitate withdrawal from a market segment - if a market that right now a primary insurer sees as being unprofitable and they want to get out they can ether cancel/nonrenew policies so that next year they wont have thoselosses or they can have a reinsurer take care of those losseso they would purchase a portfolio reinsurance which can facilitate withdrawal from a market segment and prevent the formation of ill will due to policy cancellation reinsurers do not accept all of the liability but only onces that are a certain loss exposure covered underthe primary insurers policies. They only take on the losses from the day the agreement is signed and not any previous losses- Sometimes a novation happens which is that the reinsurer becomes a insurer of the risks that was transferred over  • Provide underwriting guidance- they can help the primary insurer become better at their underwriting in order to help reduce potential losses due to the reinsurers expertise all over the world- they can assist in the primary insurers when they are entering new markets or offering new products through their expertise and knowledge of that field for an inexperience comany- How does increasing its large-line capacity allow an insurer to grow? o Increasing large-line capacity allows a primary insurer to assume more significant risks than its financial condition and regulations would otherwise permit.- What are three ways in which a primary insurer can use reinsurance to stabilize its loss experience? o A primary insurer can stabilize loss experience by obtaining reinsurance to accomplish any, or all, of these purposes:  • Limit its liability for a single loss exposure  • Limit its liability for several loss exposures affected by a common event  • Limit its liability for loss exposures that aggregate claims over time - How many primary insurer completely eliminate the liabilities it has assumed under the policies it has issued?o A primary insurer can completely eliminate the liabilities it has assumed under the insurance policies it has issued through a novation. A novation is not considered portfolio reinsurance because the substitute insurer assumes the direct obligations to insureds covered by the underlying insurance- Identify the three sources from which reinsurance may be purchased. o Reinsurance can be purchased from three sources:  • Professional reinsurers - this is the first source and they interact with other insures either directly or through intermediaries as primary insurers do.- If they work directly with the primary insurers then they are called direct writing reinsurers- Reinsurance intermediaries represent a primary insurer and workwith that insurer to develop a reinsurance program that is then placed with reinsurer or reinsurers- Professional reinsurers also evaluate before entering into an agreement because the treaty reinsurer underwrites the primary insurer as well as the loss exposures being ceded- Reinsurers also consider the primary insurers experience, reputation and management • Reinsurance departments of primary insurers  • Reinsurance pools, syndicates, and associations- these provide member companies the opportunity to participate in a line of insurance with a limited amount of capital and a proportionate share of the admin costs with out any specialists needed for such venture- with reinsurance pools the risk is split between many reinsurancecompanies to reinsure a primary insurer.o A member company takes a portion of the risk and the restis split with the pool- A syndicate is when the member collectively make another entityand each member take a percentage of the risk Association is a group of member companies that use both reinsuranceand risk sharing techiques - Describe the role of a reinsurance intermediary.o Reinsurance intermediaries generally represent a primary insurer and


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FSU RMI 4292 - Exam 3

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