Exam 3Vocab:// . / / - - - - - - /http quizlet com 17301384 rmi 4292 exam 3 vocab flash cards Chapter 10• . Briefly define reinsuranceo 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 insurer achieve?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 primaryinsurers?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 for losses that the primary insurer is unwilling or unable toretain• 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 sometimes insolvency• 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 companyo 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 those losses or they can have a reinsurer take care of thoselosseso 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 .under the 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 inexperiencecomany• - 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 underlyinginsurance• . Identify the three sources from which reinsurance may be purchasedo : Reinsurance can be purchased from three sources • Professional reinsurers• this is the first source and they interact with other insures either