What Is Your Reinsurance Iq

What’s Your Reinsurance IQ?

Examining Panel
John Chaplin, Compass Reinsurance Consulting, LLC

John Dore, Sheridan Ridge Advisers, LLC
Lynn Halper, AAO Insurance Company
Sandy Hauserman, Digital Risk Resources
Agenda
• Set up response system on your device.
• Test questions read - multiple choice answers on following
subjects
– Forms of reinsurance; Functions of reinsurance; Math (calculations of
recoveries, reinstatements, premiums, interest); profit sharing; accounting;
facultative reinsurance; etc.
• Responses – Live Polling
• Correct answers revealed
• Discussion (as warranted)
• Repeat
Question 1 – Correct Answer
1. All the following methods share profits between

the parties except
a. Minimum and Deposit premiums

b. Sliding scale rates
c. No-claims bonus
d. Profit Commissions
Profit Sharing
1. All the following methods share profits between

the parties except
a. Minimum and Deposit premiums
b. Sliding scale rates
c. No-claims bonus
d. Profit Commissions
Deposit Premium provision declares how much premium is paid during the contract term and the
Minimum Premium provision sets a floor on the amount of reinsurance premium payable for the
contract. Both are used in excess of loss contracts. b. through d. are reactive to losses,
rewarding insurer for good results with additional commissions, courtesy of the reinsurers.
Profit Sharing
2. All the following are forms of Non-Proportional

Treaty Reinsurance except
a. Aggregate excess
b. Surplus
c. Per Risk excess
d. Occurrence excess
Forms
2. All of the following are forms of Non-Proportional

Treaty Reinsurance except
a. Aggregate excess
b. Surplus
c. Per Risk excess
d. Occurrence excess
Surplus Reinsurance - Once a dominant form of reinsurance, far more rarely used today. Premiums
determined by risk (/policy) according to “rules of cession”: losses shared in the same proportion 
Proportional Form of Reinsurance.
a., c., and d. are excess (non-proportional) forms of reinsurance.
Forms
3. Which of the following is the Statutory Statement

“Schedule of Reinsurance”
a. Schedule T
b. Schedule P
c. Schedule D
d.Schedule F
Accounting
3. Which of the following is the Statutory Statement

“Schedule of Reinsurance”
a. Schedule T
b. Schedule P
c. Schedule D
d. Schedule F
Schedule F has 4 sub-Parts (previously 9!) detailing ceded and assumed amounts and counter-
parties, payment performance and bad debts/penalties, plus a modified Balance Sheet re-stated to
show the effects of ceded reinsurance.
Schedule T. – Premiums by State; Schedule P – Losses (115 Parts as of 2014); Schedule D -
Investments Accounting
4. What are the Four Basic Functions of Treaty

Reinsurance:
a. Financing, Finite Reinsurance, Proportional Reinsurance and Non-
Proportional Reinsurance
b. Capacity, Stability, Financing and Catastrophe
c. Excess of Loss, Ceding Commissions, Premiums and Losses
d. Financing, Gross to Net, Protection, Profit Commission
Functions
4. What are the Four Basic Functions of Treaty

Reinsurance:
a. Financing, Finite Reinsurance, Proportional Reinsurance and Non-
Proportional Reinsurance
b. Capacity, Stability, Financing and Catastrophe
c. Excess of Loss, Ceding Commissions, Premiums and Losses
d. Financing, Gross to Net, Protection, Profit Commission
There are many reasons why companies buy reinsurance. All are designed to improve operations and
ensure success and solvency.
Policy limit Capacity, Stability of results, (Financing) supporting PHS and Catastrophe protection are,
simply put, the primary reasons why insurers seek reinsurance. Functions
5. Which is the single, best Form of Reinsurance to

provide Financing:
a. Surplus
b. Per Risk Excess
c. Occurrence Excess
d. Quota Share
Forms
5. Which is the single, best Form of Reinsurance to

provide Financing:
a. Surplus
b. Per Risk Excess
c. Occurrence Excess
d. Quota Share
The Reinsurance Function of Financing depends on offsetting an insurer’s drain of surplus from
the burden of deferred acquisition costs. Reinsurance Ceding Commissions provide that relief and
Quota Shares typically provide the greatest amount of premium transfer and, thus, the greatest
amount of ceding commission benefit.
Forms
6. Which of the following is not usually featured in

the definition of ‘subject premium income’ in an
excess treaty?
a. Gross premiums
b. Inuring Reinsurance
c. “written” or “earned “
d.“cutoff” or “runoff”
Premiums
6. Which of the following is not usually featured in

the definition of ‘subject premium income’ in an
excess treaty?
a. Gross premiums
b. Inuring Reinsurance
c. “written” or “earned “
d. “cutoff” or “runoff”
a. through c. are premium features; d. concerns the treatment of reinsurance coverage at the end of
a treaty contract--it may affect premiums but it is not used in the definition of subject premiums.
Premiums
7. Facultative Reinsurance coverage is affected by

a. The terms of the original policy
b. The fine print terms of the facultative certificate
c. Any unique terms of the facultative agreement
d. All of the above
Facultative
8. Treaty Facts: Excess Treaty with a 2.5% rate; Deposit

Reinsurance Premium $200,000 payable 1/4th quarterly in
advance; Minimum Reinsurance Premium $190,000; final
Subject Premium $7,500,000.
What is the final account?
a. Reinsurers owe $10,000 to Reinsured
b. Reinsured owes $12,500 to Reinsurers
c. No payment
d. Reinsured owes $10,000 to Reinsurers
Premium Math
8. Treaty Facts: Excess Treaty with a 2.5% rate; Deposit Reinsurance

Premium $200,000 payable 1/4 quarterly in advance; Minimum
Reinsurance Premium $190,000; final Subject Premium $7,500,000.
What is the final account?

a. Reinsurers owe $10,000 to Reinsured
b. Reinsured owes $12,500 to Reinsurers
c. No payment
d. Reinsured owes $10,000 to Reinsurers
Final Reinsurance Premium: $190,000 (2.5% X $7,500,000 = $187,500…subject, however, to a
minimum premium amount of $190,000).
Premium already deposited--$200,000—minus $190,000 final reinsurance premium amount--
$190,000—leaving $10,000 for Reinsurers to return to Insurer. Premium Math
Question 9
9. The only two ways that excess treaties can

address loss adjustment expenses are
1. included in Ultimate Net Loss, or
2. Pro Rata in Addition.
a. True
b. False
Claims - Expenses

a. True
b. False
Claims - Expenses

a. True
b. False
There are many, many ways to deal with loss adjustment expenses (including a full exclusion of such
costs). Reinsurers have been known to limit or specify the amount of such expenses to control the
insurance company exposure. For example, the Florida Hurricane Catastrophe Fund reinsures every
property insurer in Florida and, in additional to loss, they add a fixed (5%) for loss adjustment
expenses.
Claims - Expenses
10. Excess Treaty Facts:

Limit - $32,500,000; Retention - $40,000,000.
Gross loss - $77,000,000; Inuring Reinsurance - $16,500,000.
What is the recovery?
a. $32,500,000
b. $19,990,000
c. $29,600,000
d.$20,500,000
Recovery Math
10. Excess Treaty Facts:

Limit - $32,500,000; Retention - $40,000,000.
Gross loss - $77,000,000; Inuring Reinsurance - $16,500,000.
What is the recovery?
a. $32,500,000
b. $19,990,000
c. $29,600,000
d. $20,500,000
Net Loss subject to Recovery: $77M - $16.5M = $60.5M.
Recovery = Net Loss Minus Retention = $60.5M - $40M = $20.5M.
N.B. – remember this Recovery Amount for Question 11. Recovery Math
11. Excess Treaty Facts (same as 10 – Limit $32,500,000; Retention -

$40,000,000).
Reinsurance Recovery: $20,500,000.
If there is one reinstatement of the above limit at 100% AP and the
Reinsurance Premium was $1,500,000, what AP did the
Reinsured owe to the Reinsurers (nearest $1,000)?
a. $923,000
b. $1,500,000
c. $946,000
d. $554,000
Reinstatement Math
11. Excess Treaty Facts (same as 10 – Limit: $32,500,000; Retention:
$40,000,000).
Reinsurance Recovery: $20,500,000.
If there is one reinstatement of the above limit at 100% AP and the
Reinsurance Premium was $1,500,000, what AP did the Reinsured owe to
the Reinsurers (nearest $1,000)?
a. $923,000
b. $1,500,000
c. $946,000
d. $554,000
Percentage of Limit Reinstated = Reinsurance Recovery / Limit = $20.5M / $32.5M = 63.1%
Reinstatement Premium = Reinsurance Premium X Reinstated % = $1,500,000 X 63.1% = $946,500
Reinstatement Math
12. The two forms of Treaty Reinsurance best

suited to provide Capacity to an insurer are
a. Aggregate Excess and Occurrence Excess
b. Surplus and Per Risk Excess
c. Quota Share and Aggregate Excess
d. Occurrence Excess and Quota Share
Forms
12.The two forms of Treaty Reinsurance best suited

to provide Capacity to an insurer are
a. Aggregate Excess and Occurrence Excess
b. Surplus and Per Risk Excess
c. Quota Share and Aggregate Excess
d. Occurrence Excess and Quota Share
Both the Surplus and Per Risk Excess reinsurance forms apply coverage on a risk by risk basis,
thus directly affecting an insurer’s Policy Limit Capacity. Surplus Reinsurance operates on a
proportional basis while Per Risk Excess operates on a non-proportional basis.
Forms
13.Cutoff is usually associated with a

a. “Policies Attaching” Treaty
b. Surplus Reinsurance
c. Treaties that cover business in-force at
inception
d. Continuous treaties
Treaty Terms
13.Cutoff is usually associated with a

a. “Policies Attaching” Treaty
b. Surplus Reinsurance
c. Treaties that cover business in-force at inception
d. Continuous treaties
Treaties that provide coverage for business already “on the books” (in-force) at the start of the treaty
term, are usually relieved of the obligation to cover beyond the end of the treaty term—the “run-off” of
those policies. The coverage for business in-force at the end is typically provided by the following year’s
treaty.
Treaty Terms
14. An excess contract allows one reinstatement of the

limit. When would the Reinstatement Premium be
payable?
a. As soon as the Reinsurer begins to pay the first dollar of the reinstated limit.
b. As soon as the Reinsurer pays the first dollar of
loss.
c. After the Reinsurer pays all of the reinstated limit.
d. 12 months after the end of the contract terminates.
Treaty Terms
14. An excess contract allows one reinstatement of the

limit. When would the Reinstatement Premium be
payable?
a. As soon as the Reinsurer begins to pay the first dollar of the reinstated limit.
b. As soon as the Reinsurer pays the first dollar of loss.
c. After the Reinsurer pays all of the reinstated limit.
d. 12 months after the end of the contract terminates.
As soon as a reinsurance loss under an excess contract with a reinstatement provision pays a loss, that
amount of loss is automatically and immediately reinstated. That reinstatement typically* generates a
premium obligation for the reinsured company.
*some reinstatements are “free”, thus no premium obligation.
Treaty Terms
15. Under what circumstances would you expect the term

WNKORL to appear in a reinsurance Binder or Slip?
a. Following a year of extraordinary losses under the reinsurance
treaty.
b. When a reinsurer is putting down his/her line after
the effective date of coverage.
c. When a broker has made a change to the renewal information.
d. When a loss is outstanding at the end of a contract period.
Jargon, Acronyms
15.Under what circumstances would you expect the term

WNKORL to appear in a reinsurance Binder or Slip?
a. Following a year of extraordinary losses under the reinsurance treaty.
b. When a reinsurer is putting down his/her line after the effective date of
coverage.
c. When a broker has made a change to the renewal information.
d. When a loss is outstanding at the end of a contract period.
WNKORL stands for Warranted no known or reported loss. This is a normal protection for the reinsurer
who would, absent such a warranty, be exposed to the possibility of reinsuring an existing or known loss.
Jargon, Acronyms
16. If an insurer sets up 7 line surplus treaty and they

write to a maximum net line of $500,000, what is the
largest risk they can write?
a. $1,000,000
b. $7,000,000
c. $3,500,000
d. $4,000,000
Surplus, Capacity
16.If an insurer sets up 7 line surplus treaty and they write

to a maximum net line of $500,000, what is the largest
risk they can write?
a. $1,000,000
b. $7,000,000
c. $3,500,000
d. $4,000,000
The insurer’s maximum net line is the basis for the maximum capacity provided by the Surplus treaty. A 7
line Surplus provides up to 7 times the line of the insurer or, in this case, 7 times $500,000, or $3,500,000
which, in combination with the insurer’s own line of $500,000 equals $4,000,000. QED
Surplus, Capacity
17. An arbitration Panel determines that Party A owes Party B

$425,000 due as reinstatement premium for claims that were paid
by the Reinsurer on May 16, 2018. If the award will include interest
and must be paid on October 3, 2019, how much interest will be
awarded at 6% simple interest?
a. $25,501
b. $51,000
c. $35,281
d. $42,500
Math – Interest Calc

17. An arbitration Panel determines that Party A owes Party B $425,000 due as
reinstatement premium for claims that were paid by the Reinsurer on May 16, 2018.
If the award will include interest and must be paid on October 3, 2019, how much
interest will be awarded at 6% simple interest?
a. $25,501
b. $51,000
c. $35,281
d. $42,500
Interest owed each day = Interest Rate X Amount / 365 = 6% X $425,000 / 365 = $69.86
Total Interest = Daily Interest X # days = $69.86 X 505 = $35,281
Number of days can be easily determined using a spreadsheet to perform the calculation by subtracting one
date from the other.
Math – Interest Calc
18. If the reinsurance contract contained a Commutation

Clause, which line of business would you expect to be
covered under that treaty?
a. Marine
b. General Liability
c. Property
d. Workers Compensation
Treaty Terms - Commutation

19. If the reinsurance contract contained a Commutation

Clause, which line of business would you expect to be
covered under that treaty?
a. Marine
b. General Liability
c. Property
d. Workers Compensation
Workers Compensation often involves unusually long claim payout characteristics. The commutation
clause in a general, or a blanket, casualty treaty foreshortens such claims by way of a calculation that
predicts the future loss to the reinsurer, paid currently on a discounted basis.
Treaty Terms - Commutation

19. What is the highest insurance company

Financial Strength Rating from AM Bests’:
a. A
b. Aaa
c. A++
d. A/A+
Ratings
20.The two Parties to a Retrocession Treaty are:

a. Retrocedant and Insured
b. Reinsurer and Co-reinsurer
c. Broker and Intermediary
d. Retrocessionaire and Retrocedant
20. The two Parties to a Retrocession Treaty are:

a. Retrocedant and Insured
b. Reinsurer and Co-reinsurer
c. Broker and Intermediary
d. Retrocessionaire and Retrocedant
Retrocessions are unique transactions in the field of reinsurance with their own special naming
protocols. It doesn’t get any more unique after retrocessions: a retrocession of a retrocessionaire is
still a retrocession, the retrocessionaire becomes a retrocedant and there is yet a further
retrocessionaire. Clear?
Retrocessions
What is This Panel’s Reinsurance IQ?
Questions From The Floor…

What Is Your Reinsurance Iq

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What’s Your Reinsurance IQ?

What’s Your Reinsurance IQ?

John Chaplin, Compass Reinsurance Consulting, LLC

1. All the following methods share profits between

a. Minimum and Deposit premiums

1. All the following methods share profits between

2. All the following are forms of Non-Proportional

2. All of the following are forms of Non-Proportional

3. Which of the following is the Statutory Statement

3. Which of the following is the Statutory Statement

4. What are the Four Basic Functions of Treaty

4. What are the Four Basic Functions of Treaty

5. Which is the single, best Form of Reinsurance to

5. Which is the single, best Form of Reinsurance to

6. Which of the following is not usually featured in

6. Which of the following is not usually featured in

7. Facultative Reinsurance coverage is affected by

8. Treaty Facts: Excess Treaty with a 2.5% rate; Deposit

8. Treaty Facts: Excess Treaty with a 2.5% rate; Deposit Reinsurance

What is the final account?

9. The only two ways that excess treaties can

9. The only two ways that excess treaties can

9. The only two ways that excess treaties can

10. Excess Treaty Facts:

10. Excess Treaty Facts:

11. Excess Treaty Facts (same as 10 – Limit $32,500,000; Retention -

12. The two forms of Treaty Reinsurance best

12.The two forms of Treaty Reinsurance best suited

13.Cutoff is usually associated with a

13.Cutoff is usually associated with a

14. An excess contract allows one reinstatement of the

14. An excess contract allows one reinstatement of the

15. Under what circumstances would you expect the term

15.Under what circumstances would you expect the term

16. If an insurer sets up 7 line surplus treaty and they

16.If an insurer sets up 7 line surplus treaty and they write

17. An arbitration Panel determines that Party A owes Party B

Math – Interest Calc

18. If the reinsurance contract contained a Commutation

Treaty Terms - Commutation

19. If the reinsurance contract contained a Commutation

Treaty Terms - Commutation

19. What is the highest insurance company

20.The two Parties to a Retrocession Treaty are:

20. The two Parties to a Retrocession Treaty are:

Questions From The Floor…

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