Proportional Reinsurance Treaties Overview
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Proportional Reinsurance Treaties Overview

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Questions and Answers

What is the purpose of defining the extent of the reinsured's liability in a treaty?

  • To allocate all losses to the reinsurer
  • To specify penalties for the reinsured
  • To determine shared responsibility during heavy losses (correct)
  • To eliminate the need for premium reserves

    • Which of the following correctly describes premium reserves?

  • They are a legal obligation to maintain funds in physical cash
  • They represent a portion of the ceded premium held for future claims (correct)
  • They are only required by the reinsurer
  • They are a fixed percentage of the reinsured's assets

    • What role does the letter of credit play in the context of claims or loss reserves?

  • It acts as a guarantee that all claims will be paid directly by the reinsurer
  • It allows the reinsured to draw funds from a mutually acceptable bank under specific terms (correct)
  • It eliminates the need for maintaining cash reserves completely
  • It serves as a financial penalty for default on the contract

    • Which of the following factors is NOT typically defined within a reinsurance treaty?

    <p>Timeline of claims payments</p> Signup and view all the answers

    Why were premium and claims reserves developed as a safeguard for the reinsured?

    <p>To protect against potential reinsurer insolvency</p> Signup and view all the answers

    What is the primary characteristic of a proportional reinsurance treaty?

    <p>Automatic acceptance of all insured risks within the treaty limits.</p> Signup and view all the answers

    Which of the following statements best describes the role of commissions in proportional reinsurance?

    <p>Commissions may include loss participation clauses.</p> Signup and view all the answers

    What is meant by premium and claims reserves in proportional reinsurance?

    <p>Provisions made for future premium collections and claims payments.</p> Signup and view all the answers

    In the operation of proportional reinsurance treaties, cession limits refer to what?

    <p>The maximum amount that can be ceded to the reinsurer.</p> Signup and view all the answers

    What distinguishes earned premiums from unearned premiums in proportional reinsurance?

    <p>Earned premiums have already been recognized as income, whereas unearned premiums have not.</p> Signup and view all the answers

    Which accounting method is primarily used in managing proportional reinsurance treaties?

    <p>Accrual accounting.</p> Signup and view all the answers

    What is the significance of event limits in proportional reinsurance treaties?

    <p>They set the maximum payout for specific catastrophic events.</p> Signup and view all the answers

    Which description best defines non-proportional treaties compared to proportional treaties?

    <p>They involve a more complex risk-sharing mechanism.</p> Signup and view all the answers

    What is a significant characteristic of quota share treaties regarding the selection of risks?

    <p>All risks within the retention pattern are ceded.</p> Signup and view all the answers

    What factor does NOT influence the size of a commission in reinsurance arrangements?

    <p>Type of insurance regulator</p> Signup and view all the answers

    Which of the following is an advantage of quota share treaties?

    <p>No up-front costs are incurred.</p> Signup and view all the answers

    What is a disadvantage of a quota share treaty related to profitability?

    <p>Large amounts of income may be ceded away.</p> Signup and view all the answers

    Which characteristic typically corresponds with flat-rate commissions?

    <p>Stable results over time</p> Signup and view all the answers

    How does a quota share treaty affect the insurer's ability to vary its retention risk?

    <p>A quota share treaty is inflexible in retention risk variation.</p> Signup and view all the answers

    What does a higher flat-rate commission typically indicate?

    <p>Higher ceding insurer’s administration costs</p> Signup and view all the answers

    What is the timeframe for settling balances after submitting quarterly accounts in a quota share treaty?

    <p>Within 60 or 90 days</p> Signup and view all the answers

    In which situation are flat-rate commissions likely to be lower?

    <p>For facultative business</p> Signup and view all the answers

    In what situation must an insurer resort to facultative reinsurance when using a quota share treaty?

    <p>If the risk doesn’t entirely fit within treaty arrangements.</p> Signup and view all the answers

    What is a potential outcome if a reinsurance treaty proves to be very profitable?

    <p>The ceding insurer may request additional commission</p> Signup and view all the answers

    How does the commission for surplus treaty arrangements generally compare to quota share arrangements?

    <p>Lower due to higher administration involved</p> Signup and view all the answers

    Which of the following statements about the relationship between insurer and reinsurer in a quota share treaty is true?

    <p>The reinsurer follows the fortunes of the insurer closely.</p> Signup and view all the answers

    When might a reinsurance commission be reduced?

    <p>When premiums are ceded net of original commissions</p> Signup and view all the answers

    What unintended benefit does sharing risks through a quota share treaty provide to an insurer?

    <p>Natural perils or catastrophe reinsurance capacity.</p> Signup and view all the answers

    Which of the following does NOT typically influence the percentage of a flat-rate commission?

    <p>The number of claims filed</p> Signup and view all the answers

    What primary liability does a reinsurer accept upon the transfer of unexpired policies?

    <p>Future liabilities and outstanding claims from previous years</p> Signup and view all the answers

    In non-proportional treaties, how is the reinsurance premium determined?

    <p>Determined solely by reinsurers</p> Signup and view all the answers

    Why are reinsurers generally unwilling to allow reductions in reinsurance premiums by way of commission?

    <p>They do not share in the original risks</p> Signup and view all the answers

    What is the role of ceding commissions in proportional treaties?

    <p>To reduce the cost of reinsurance for the reinsured</p> Signup and view all the answers

    What assumption is made from the start regarding the profitability of a proportional treaty?

    <p>It ought to be profitable in the long run</p> Signup and view all the answers

    Which option best describes the nature of risks retained by the reinsured in non-proportional treaties?

    <p>All risks underwritten in a specific class or account</p> Signup and view all the answers

    What is a primary characteristic of proportional reinsurance contracts?

    <p>They involve sharing original risks directly</p> Signup and view all the answers

    What is a key factor to consider for the success of a proportional treaty?

    <p>Negotiated ceding commissions must be reasonable</p> Signup and view all the answers

    Study Notes

    Proportional Reinsurance Treaties

    • Characteristics:
      • Agreement between insurer and reinsurer for automatic acceptance of all risks within treaty limits.
      • Insurer cedes risk, reinsurer accepts automatically.
      • Facilitates immediate cover for insured proposals within treaty scope.
      • Includes quota share treaties, which are used to restore balance after periods of poor results or as a means of maintaining reinsurance capacity.
      • Also includes group insurance arrangements where subsidiaries within a large organization share risks to mitigate potential losses.
      • Provides natural catastrophe reinsurance capacity for the insurer because all risks are shared proportionally.

    Advantages and Disadvantages of Quota Share Treaties

    Advantages

    • Absolute relationship between insurer and reinsurer.
    • Simple accounting and reporting.
    • No upfront costs, balances settled after quarterly accounting.
    • Flexibility in adjusting quota share at each anniversary.
    • Unlimited loss recoveries for individual or aggregated risk events.

    Disadvantages

    • Cession of substantial income, potentially detrimental if business is profitable.
    • Inflexible, insurer cannot choose to vary retention risk for individual risks.
    • Requires alternative reinsurance methods for risks outside treaty scope.
    • Insurer bound by treaty terms, including liability for transferred risk.

    Commissions and Deductions

    • Ceding commissions: Payments made by reinsurers to insurers to compensate for acquisition and administration costs.
    • Factors influencing commission amount: Type of reinsurance, profitability history, market conditions, original commission paid by insurer, ceding insurer's administrative costs.

    Types of Commissions

    • Flat-rate commission: A percentage of gross premiums ceded, adjusted based on reinsurance type, business class, and other factors.
    • Profit commission (flat-rate basis): Additional commission granted if treaty is profitable, calculated based on loss ratio and designed to offset unusually heavy losses.

    Premium and Claims Reserves

    • Premium reserve deposit: A proportion of the ceded premium held by the reinsured to ensure payment of justified claims if the reinsurer defaults.
    • Claims or loss reserve deposit: An estimate of outstanding losses held by the reinsured to protect them from reinsurer default.

    Cession and Event Limits

    • Cession Limit: The maximum amount of risk that can be ceded to the reinsurer under the treaty.
    • Event Limit: The maximum amount of loss that the reinsurer will cover for a single event, even if the total loss exceeds the cession limit.

    Key Points

    • Proportional reinsurance treaties are a vital tool for managing risk and ensuring financial stability.
    • Careful consideration must be given to the various factors involved in selecting the appropriate treaty type, commission arrangements, and reserve requirements.
    • This type of reinsurance provides benefits such as increased capacity, risk diversification, and cost savings.
    • However, it is important to understand the potential downsides, such as the cession of profits and limited flexibility.

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    Related Documents

    Ch4.pdf PDF - Features and Operation of Proportional Reinsurance Treaties

    Description

    This quiz explores the characteristics, advantages, and disadvantages of proportional reinsurance treaties, particularly focusing on quota share agreements. Understand the automatic acceptance of risks and the operational benefits that such treaties offer to insurers and reinsurers. Test your knowledge on how these arrangements impact insurance capacity and risk mitigation.

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