Chapter 1: Introduction to Reinsurance

Extensive vocabulary flashcards covering basic reinsurance terms, principal functions, transaction types, sources of reinsurance, and professional trade associations.

Reinsurance

The transfer from one insurer (the primary insurer) to another (the reinsurer) of some or all of the financial consequences of certain loss exposures covered by the primary insurer’s policies.

Primary Insurer

The party that cedes loss exposures to a reinsurer; also referred to as the reinsured, the ceding company, the cedent, or the direct insurer.

Reinsurance Agreement

The specific contract that identifies the policies included and the terms under which reinsurance is provided.

Retention

The part of its original liability that the primary insurer is required to keep, expressed as either a percentage of the original amount of insurance or as a dollar amount of loss.

Risk (in Reinsurance)

The subject of insurance, such as an individual building, a single policy, a group of policies, or an entire class of business.

Ceding Commission

An amount paid by the reinsurer to the primary insurer to cover policy acquisition expenses such as producer commissions, premium taxes, and underwriting expenses.

Retrocession

A transaction where one reinsurer (the retrocedent) transfers part of the liability it has accepted to another reinsurer (the retrocessionaire).

Large-Line Capacity

The maximum amount of insurance or limit of liability an insurer can assume based on financial condition and regulatory limits.

10 Percent Rule

Insurance regulation prohibiting an insurer from retaining more than $10\%$ of its policyholders’ surplus on any one loss exposure.

Catastrophe Protection

A function of reinsurance that protects against the financial consequences of a single event causing multiple losses in a concentrated area.

Surplus Relief

A function of reinsurance that satisfies regulatory constraints on excess growth by replenishing policyholders' surplus through ceding commissions.

Capacity Ratio

The key financial ratio of written premiums to policyholders’ surplus, generally considered out of bounds by regulators if it exceeds $3$ to $1$ or $300\%$.

Portfolio Reinsurance

An agreement where a reinsurer accepts all the liability for certain loss exposures covered under the primary insurer’s policies to facilitate withdrawal from a market segment.

Novation

A legal substitution where a substitute insurer assumes the direct obligations to the insured, eliminating the original insurer's liability; not considered portfolio reinsurance.

Treaty Reinsurance

Also known as obligatory reinsurance, it uses one agreement for an entire class or portfolio of loss exposures.

Facultative Reinsurance

Also known as nonobligatory reinsurance, it involves negotiating a separate agreement for each individual loss exposure that the primary insurer wants to reinsure.

Facultative Certificate

A document issued by a reinsurer that is attached to the primary insurer's copy of the specific policy being reinsured.

Facultative Treaty

A hybrid agreement where the primary insurer and reinsurer agree on how subsequent individual facultative submissions will be handled.

Facultative Obligatory Treaty

Also called a semi-obligatory treaty, this hybrid allows the primary insurer the option of ceding exposures while the reinsurer is obligated to accept them.

Direct Writing Reinsurer

A professional reinsurer whose own employees deal directly with primary insurers.

Reinsurance Intermediary

A professional who represents a primary insurer to develop and place a reinsurance program, typically receiving a brokerage commission from the reinsurer.

Utmost Good Faith

The underlying principle of a reinsurance relationship where each party is obligated to disclose all material facts about the agreement.

Reinsurance Pool

An entity where a policy is issued by one member company and then reinsured by other members according to predetermined percentages.

Syndicate

An entity where each member shares risk by accepting a percentage of it, collectively operating as a single unit under a group name.

Association

An organization of member companies that use both reinsurance and risk-sharing techniques, often attaching a reinsurance certificate to policies.

Intermediaries and Reinsurance Underwriters Association (IRU)

Founded in 1967, this association of non-life treaty reinsurance professionals publishes the Journal of Reinsurance.

Brokers & Reinsurance Markets Association (BRMA)

An organization representing U.S. treaty reinsurance intermediaries and reinsurers, known for compiling the Contract Wording Reference Book.

Reinsurance Association of America (RAA)

A not-for-profit trade association of professional reinsurers and intermediaries headquartered in Washington, D.C.