Chapter 3: The Reinsurance Placement Process Flashcards

Direct Writing Marketing System: Reinsurers sell directly to primary insurers using their own sales force. Services include program design, actuarial evaluation, and advice on underwriting, accounting, and claim handling.
Broker Marketing System: Reinsurance intermediaries broker transactions and are paid via a commission called brokerage. They examine worldwide markets to optimize price, coverage, and financial security.
Comparison: Direct writing reinsurers often have financial resources for sizable programs, while the broker system is more common internationally. Some reinsurers operate in both systems.

Step 1: Select a Marketing System: Selection depends on compatibility with the primary insurer's own system, the need for intermediary services, and the complexity of loss exposures.
Step 2: Develop a Reinsurance Agreement Proposal: Involves identifying needs and market resources. Direct writing involves direct negotiation; broker systems involve the intermediary contacting prospective reinsurers and obtaining quotes.
Step 3: Complete Agreement Documentation: Negotiations are reduced to writing to establish intent, meet regulatory requirements, and provide a framework for resolving disputes.
Co-Agreements: Primary insurers often use both direct and broker systems simultaneously due to increased complexity and high-capacity demands.

Broker of Record Letter: A written authorization from the primary insurer allowing a reinsurance intermediary to negotiate on its behalf.
Premium and Loss Account: Reinsurance intermediaries must maintain accounts that separate their own funds from those of primary insurers and reinsurers.
Nine-Month Rule: An NAIC accounting rule requiring reinsurance agreements to be signed no later than $9$ months after the effective date to receive reinsurance accounting treatment.
Contract Certainty: A regulatory focus requiring final agreement on all terms by the time the contract is entered into.
Dispute Resolution: Disputes are typically resolved through arbitration, where preagreement documentation may be used to determine the parties' intentions.

Process: Includes proposal, clearance/underwriting, authorization, confirmation, binder, and the final certificate.
Clearance and Overlining: Reinsurers use clearance to ensure they do not provide coverage beyond their desired maximum for a single exposure, known as overlining.
Underwriting Factors: Underwriters evaluate COPE (construction, occupancy, protection, and external exposures), premium quoted, and type of reinsurance (pro rata or excess of loss).
Exposure Rating Tools:
- Increased Limit Factor Tables: Developed by ISO for casualty pricing.
- Lloyd's Property First Loss Scale: A reliable tool for property pricing.
- PSOLD (Commercial Property Size-of-Loss Database): An ISO product used for pricing excess property layers.
Documentation: The temporary agreement is the reinsurance binder; the final legal contract is the facultative reinsurance certificate.

Underwriting Information: Proposals include limits profiles (summarizing coverage ranges), geographic distribution of exposures, and management philosophy.
Loss History: Reinsurers typically require $3$ to $5$ years of history for property insurance and $10$ or more years for liability insurance due to longer settlement periods.
Pricing and Commissions: Pro rata treaty pricing is based on the reinsurance commission (including any override), while excess of loss pricing uses reinsurance rates applied to the subject premium.
Commencement and Termination:
- Losses-Occurring: Covers losses occurring during the treaty period.
- Policies-Attaching: Covers losses on policies issued or renewed after the treaty inception.
Cancellation Options:
- Cut-off: Terminating responsibility for losses as of the expiration date.
- Run-off: Continuing responsibility until the underlying policy expires.
Placement Structure: Reinsurance intermediaries often offer proposals to a lead reinsurer who sets terms, followed by additional following reinsurers.