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CPCU Core Review ARe 144, Reinsurance Principles and Practices, 1st edition
Copyright Dylan H. Kim, CPCU, CFA, 2014. All rights reserved.
chartermaker@illisharing.com
e-ISBN: 979-11-85406-08-4
ISBN: 978-1502490001
2
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The CPCU Core Review ARe 144 should be used in conjunction with the
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3
NOTES FROM THE AUTHOR
4
CONTENTS
5
SECTION 11. Aggregate Excess of Loss Treaties
6
CPCU Exam Guide
Foundation Courses
CPCU 500Foundations of Risk Management and Insurance
CPCU 520Insurance Operations
CPCU 530Business Law for Insurance Professionals
CPCU 540 Finance and Accounting for Insurance Professionals
7
CPCU Core Review ARe 144, Reinsurance Principles and Practices
Elective Courses
AAI 83Agency Operations and Sales Management
AIC 34Workers Compensation and Managing Bodily Injury Claims
AIC 31Property Claim Practices*
AIC 32Liability Claim Practices*
ARe 144Reinsurance Principles and Practices
ARM 56Risk Financing
AU 67Strategic Underwriting Techniques*
CPCU 560Financial Services Institutions
ERM 57Enterprise-Wide Risk Management: Developing and Implementing
8
CPCU Exam Guide
Exam Dates
Testing Windows for Computer Administered Institutes Exams
January 15-March 15
April 15-June 15
July 15-September 15
October 15-December 15
Exam Format
Exams are administered on computer. Computer administered exams are
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check-in.
9
CPCU Core Review ARe 144, Reinsurance Principles and Practices
Exam Fee
CPCU 520, Oct 15 - Ded 15, 2015 for example
Institutes Prometric Test Prometric Test
Approved On-Site Center Early Center Standard
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10
CPCU Exam Guide
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Taking an Exam
Note: The following information refers to the CPCU Registration Booklet from
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Examinee Conduct
CPCUs and CPCU candidates are subject to the CPCU Code of Professional
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Furthermore, you will not be permitted to sit for an exam if you do not agree to
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and will forfeit the registration fee.
11
CPCU Core Review ARe 144, Reinsurance Principles and Practices
Prohibited Items
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12
CPCU Exam Guide
Exam Grading
Multiple-Choice Exams: As soon as you complete the exam, you will receive an
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13
CPCU Core Review ARe 144, Reinsurance Principles and Practices
14
SECTION 1. INTRODUCTION TO REINSURANCE
15
SECTION 1. Insurance Operations
16
Topic 1: Classification of Insurers
17
SECTION 1. Insurance Operations
18
Topic 1: Classification of Insurers
Answer
III. A primary insurer could obtain surplus relief through reinsurance by
receiving ceding commissions to offset policy acquisition expenses.
IV. The retention under a surplus share or excess of loss reinsurance is
expressed in the form of stipulated dollar amount.
V. For accounting purposes, expenses are recognized as reserve at the time a
new policy is sold and premiums be recognized as they are earned throughout
the policy's life.
The correct answer is (A) I and II only.
19
SECTION 1. Insurance Operations
(B) II only
Answer
I. Large-line capacity is an insurer's ability to reinsure a larger proportion of its
single risk, not multiple risks.
The correct answer is (A) I only.
20
Topic 2: Reinsurance Transactions and Sources
21
SECTION 1. Insurance Operations
2.g. Syndicate
Syndicate is a group of insurers or reinsurers involved in joint underwriting to
insure major risks that are beyond the capacity of a single insurer or reinsurer;
each syndicate member accepts predetermined shares of premiums, losses,
expenses, and profits.
Each member shares the risk with other members by accepting a percentage of
the risk. These members collectively constitute a single, separate entity under the
syndicate name. Syndicates are a key component of Lloyd's, an association that
provides the physical and procedural facilities for its members to write
insurance.
22
Topic 2: Reinsurance Transactions and Sources
2.h. Association
Association is an organization of member companies that reinsure by fixed
percentage the total amount of insurance appearing on policies issued by the
organization. On most occasions, the member companies issue their own policies;
however, a reinsurance certificate is attached to each policy, under which each
member company assumes a fixed portion of the total amount of insurance.
Organizations of this type allow members to share risks that demand special
coverages or special underwriting techniques, and can enhance the primary
insurer's capacity to insure extra-hazardous risks.
23
SECTION 1. Insurance Operations
(C) IV and V
(D) II and V
Answer
IV. Although some treaties allow the reinsurer limited discretion in reinsuring
individual loss exposures, most treaties require that all loss exposures within the
treaty's terms must be reinsured.
V. A primary insurer's underwriting policy and underwriting guidelines are
usually developed by its staff underwriters.
The correct answer is (C) IV and V.
24
Topic 2: Reinsurance Transactions and Sources
Answer
I. The administrative costs associated with placing facultative reinsurance are
relatively high.
II. Facultative reinsurance is generally an important option for insuring classes
of loss exposures that are excluded under treaty reinsurance.
III. Primary insurers generally use treaty reinsurance as the foundation of their
reinsurance program.
The correct answer is (C) IV and V only.
25
SECTION 1. Insurance Operations
Answer
II. One function of facultative reinsurance is to protect a primary insurer's
treaties from adverse loss experience.
III. Administrative costs per-risk are higher under a facultative reinsurance
arrangement than under a treaty reinsurance arrangement.
The correct answer is (B) II and III only.
26
Topic 2: Reinsurance Transactions and Sources
Answer
III. Reinsurance intermediaries generally represent primary insurers and
receive a brokerage commission from the reinsurers.
V. BRMA is one of reinsurance professional and trade association and
represents intermediaries and reinsurers that are predominately engaged in
United States treaty reinsurance business obtained through reinsurance brokers.
The correct answer is (B) III and V only.
27
SECTION 1. Insurance Operations
(C) IV only
Answer
III. When a primary insurer offers reinsurance it usually separates the
reinsurance operations to maintain the confidentiality of insurer information.
The correct answer is (B) III only.
28
Topic 3: Types of Reinsurance
29
SECTION 2. Types of Reinsurance and Program Design
30
Topic 3: Types of Reinsurance
31
SECTION 2. Types of Reinsurance and Program Design
32
Topic 3: Types of Reinsurance
33
SECTION 2. Types of Reinsurance and Program Design
34
Topic 3: Types of Reinsurance
(B) II only
Answer
I. Reinsurance cession is 80%, 0.8 x $80,000. = $64,000.
II. A specific loss exposure is $30mil., primary insurers retention is $5mil., and
reinsurance cession amount is $25mil., so the percentage of reinsurance cession is
83.33%.
III. The difference between (A) and (B) is $50,000.
Reinsurance recovery
Loss
Policy $750,000 xs $250,000 per $800,000 xs $800,000 per
Amount
policy XOL (A) occurrence XOL (B)
1 $300,000 $50,000 -
2 $400,000 $150,000 -
3 $900,000 $650,000 -
Total $1,600,000 $850,000 $800,000
35
SECTION 2. Types of Reinsurance and Program Design
Answer
I. The surplus share treaty does not cover policies with amounts of insurance
that are less than the primary insurer's line. So, many primary insurers use
surplus share reinsurance instead of quota share reinsurance so that they do not
have to cede any part of the liability for loss exposures that can be safely
retained.
II. Quota share and surplus share reinsurance provide surplus relief to the
primary insurer.
The correct answer is (A) I and II only.
36
Topic 3: Types of Reinsurance
Answer
II. Pro rate reinsurance is generally chosen by newly incorporated insurers or
insurers with limited capital because it is effective in providing surplus relief.
V. Variable quota share treaties has the advantage of enabling a primary
insurer to retain a larger proportion of the small loss exposures that are within its
financial capability to absorb, while maintaining a safer and smaller retention on
larger loss exposures.
The correct answer is (D) II and V only.
37
SECTION 2. Types of Reinsurance and Program Design
Answer
III. Under a per policy excess of loss treaty, the attachment point and the
reinsurance limit apply separately to each insurance policy regardless of the
number of losses occurring under each policy.
IV. Under a per occurrence excess of loss treaty, the attachment point and the
reinsurance limit apply to the total losses arising from a single event affecting one
or more policies.
The correct answer is (C) III and IV only.
38
Topic 3: Types of Reinsurance
(A) The limit for Policy A will Heungkuk Insurance cede to Cedars Reinsurance
is $0.
(B) The premium for Policy B will Heungkuk Insurance cede to Cedars
Reinsurance is $3,000.
(C) The limit for Policy C will Heungkuk Insurance cede to Cedars
Reinsurance is $500,000.
(D) The loss for Policy C will Cedars Reinsurance pay is $87,500.
Answer
(D) The reinsurance percent would be 62.5% (= $500,000/$800,000), so the loss
paid by reinsurer will be $62,500.
The correct answer is (D).
39
SECTION 2. Types of Reinsurance and Program Design
40
Topic 4: Alternatives to Traditional Reinsurance
4.i Sidecar
This is a limited-existence special purpose vehicle (SPY) that provides a
primary insurer additional capacity to write property catastrophe business or
other short-tail lines by using a quota share agreement with private investors.
41
SECTION 2. Types of Reinsurance and Program Design
42
Topic 4: Alternatives to Traditional Reinsurance
(D) V only
Answer
II. Under a cat bond, investors receive their return for the risk assumed
through periodic interest payments on the principal amount assumed.
III. A catastrophe risk exchange is a means through which a primary insurer
can exchange a portion of its insurance risk for another insurer's insurance risk.
Cat option has a strike price at which the primary insurer will be able to receive
cash from its investors to enable it to pay losses from a catastrophe.
The correct answer is (B) II and III only.
43
SECTION 2. Types of Reinsurance and Program Design
44
Topic 5: Reinsurance Program Design
45
SECTION 2. Types of Reinsurance and Program Design
46
Topic 5: Reinsurance Program Design
Answer
II. Generally, primary insurers selling personal insurance need less reinsurance
than others selling commercial insurance because personal insurance loss
exposures need relatively lower coverage limits. Personal insurance loss
exposures are usually more homogeneous and subject to fewer severe hazards
than commercial insurance loss exposures.
IV. A primary insurer that sells various kinds of insurance is more diversified
and therefore more prone to enjoy a stable loss ratio than a primary insurer
selling only a few types of insurance.
The correct answer is (B) II and IV only.
47
SECTION 2. Types of Reinsurance and Program Design
Answer
I. A primary insurer that plans to grow is likely to need additional reinsurance
for all of the following reasons: Growth usually causes a drain on
policyholders' surplus. Variability of the loss ratio on new policies could cause
instability of underwriting results. Growth could entail expanding into
markets with greater coverage requirements.
II. Clash coverage limits should be set by considering all of the following:
Potential for multiple primary policies to be involved in a single occurrence
Potential for excess of policy limits losses Policy limits offered by the primary
insurer.
The correct answer is (A) I and II only.
48
Topic 5: Reinsurance Program Design
(B) II only
Answer
The correct answer is (D) none of the above.
49
SECTION 2. Types of Reinsurance and Program Design
50