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THE CHARTERED

INSURANCE INSTITUTE

825
The application of reinsurance
Objective: To develop in the candidate:
an understanding of the operation of reinsurance markets;
an understanding of the types of reinsurance available;
an understanding of how a reinsurance programme is created and how a reinsurance
portfolio is managed;
an understanding of the financial aspects of reinsurance;
the ability to apply knowledge and skills to practical situations;
the ability to synthesise different aspects of the syllabus and apply them to given scenarios.
Assumed knowledge and application skills: 1.4 Raising capital
It is assumed that the candidate already has a knowledge Candidates should be able to
gained from a study of 785 Principles of reinsurance or an evaluate the use of reinsurance as a capital raising/
equivalent qualification. freeing mechanism.
Method of assessment: See page 7 in the 2005 Advanced
Diploma in Insurance Information for candidates brochure.
Notes:
2. Reinsurance underwriting information
The syllabus will be based on UK law and practice. 2.1 Property proportional
The April session will test the legal position as of 31st Candidates should be able to
August of the preceding year.
discuss the requirements for underwriting and pricing
The October session will test the legal position as of 28th treaty reinsurance, including:
February of the same year.
details of the portfolio;
retention of the ceding company;
1. The buyers reinsurance needs spread of business to be reinsured;
catastrophe exposure;
1.1 Influencing factors
the ceding companys record of performance and
Candidates should be able to
the commission.
discuss the factors influencing or limiting retention and
reinsurance cover purchased, including: 2.2 Property excess of loss
insurers assets; Candidates should be able to
size of portfolio; discuss the requirements for underwriting and pricing
types and spread of risks; excess of loss reinsurance, including:
patterns of losses; details of the portfolio;
assessment of gross exposure; retention of the reinsured;
net loss exposure relative to financial resource. spread of business to be reinsured;
catastrophe exposure;
1.2 Financial policy
subject premium income;
Candidates should be able to
claims history.
explain the impact of financial policy on the purchase of
reinsurance, including cash flow, and corporate attitude 2.3 Casualty
to risk.
Candidates should be able to
1.3 The reinsurance market discuss the requirements for underwriting and pricing
excess of loss reinsurance, including:
Candidates should be able to
details of the portfolio;
discuss the reinsurance market, including security
considerations and the effect of reinsurance on capital retention of the reinsured;
cost and return. subject premium income;
full portfolio;
claims history.

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The Chartered Insurance Institute 2004
2.4 Expertise and philosophy type of programme and terms;
Candidates should be able to reinstatement limits;
explain the effect of a companys management expertise applying rating methods;
and underwriting philosophy on the buying of reinsurance. catastrophe modelling.

3. The reinsurance programme 3.8 Stop loss and aggregate excess of loss treaties
Candidates should be able to
3.1 Reinsurance programmes explain the purpose of stop loss and aggregate excess of
Candidates should be able to loss treaties and their application to property business
discuss the process for designing and placing reinsurance classes together with underwriting features and
programmes for various classes of business including rating techniques.
programmes of more than one class;
3.9 Casualty excess of loss treaties
explain the arrangement of the required reinsurance
programme, including selection of markets, reinsurers Candidates should be able to
and brokers. discuss the issues affecting the underwriting of casualty
excess of loss treaties, including:
3.2 Combination of proportional and non-proportional treaties claims inflation;
Candidates should be able to incurred but not reported (IBNR) losses;
explain the gross line surplus retention protected by risk the application of specific terms and conditions;
excess of loss.
index clause, change in law clause, extended claims
reporting clause;
3.3 The rate making process
seepage and pollution limitations;
Candidates should be able to
North American exclusions;
discuss the general principles of the rate-making
process, including: specific exclusions.
working covers and other layers;
calculating the premium; 4. Reinsurance portfolio management
deposit premiums.
4.1 Exposures
3.4 Reinstatements Candidates should be able to
Candidates should be able to explain methods of and reasons for compiling, maintaining
evaluate the effect of reinstatements, aggregate and monitoring reinsurers aggregate exposures;
deductibles, estimated maximum loss (EML) and explain the methods and importance of
event limitations. catastrophe modelling.

3.5 Property proportional treaty 4.2 Risk


Candidates should be able to Candidates should be able to
discuss the issues affecting the underwriting of property explain reinsurers attitude to risk and risk limitation.
proportional treaty reinsurance for risk excess of
loss including: 4.3 Retrocession
scope of cover and exclusions; Candidates should be able to
application of underwriting principles in deciding describe the advantages and disadvantages
commission terms; of retrocession.
assessment of attritional losses, large losses and
catastrophe losses; 4.4 Monitoring reinsurance programmes
application of event limits and loss corridors; Candidates should be able to
reinsurers expense and profit margins; discuss the review of reinsurance programmes, including
the examination of existing programmes and alternatives;
accounting frequency, cash loss level, premium and
loss reserves. analyse reinsurance programme results.

3.6 Property non-proportional treaty reinsurance for risk 4.5 Managing the cycle
excess of loss Candidates should be able to
Candidates should be able to explain the reasons for and characteristics of different
discuss the issues affecting the underwriting of property market cycles;
non-proportional treaty reinsurance for risk excess of loss discuss how the cycles may be managed.
cover including:
working covers; 4.6 Financial implications
type of programme and terms; Candidates should be able to
reinstatement and event limits; discuss the implications of programme performance for
applying rating methods including burning cost. reinsurers financial objectives.

3.7 Property non-proportional treaty reinsurance for 5. Alternative risk transfer


catastrophe excess of loss
Candidates should be able to 5.1 ART
discuss the issues affecting the underwriting of property Candidates should be able to
non-proportional treaty reinsurance for catastrophe discuss the implications of using the various forms of ART.
excess of loss cover, including:

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The Chartered Insurance Institute 2004
6. Financial aspects Reading list
The following list provides details of various publications, which
6.1 Financial considerations may assist with your studies. The primary text for this syllabus
Candidates should be able to is shown in bold type. Periodicals and publications listed as
additional reading will be of value in ensuring candidates keep
explain the considerations for investment of a reinsurers up to date with developments and in providing a wider coverage
fund with particular reference to: of syllabus topics. Any reference materials cited are authoritative,
type of investment; detailed works which should be used selectively as and
relationship of assets to liabilities; when required.
currency matching. Note: The examination will test the syllabus alone. The reading
list is provided for guidance only and is not in itself the subject
6.2 Structure of the examination.
Candidates should be able to Most of these additional study materials can be borrowed or
purchased from CII Information Services at www.cii.co.uk/is
describe the structure of underwriting accounts.

6.3 Evaluation Primary text


Candidates should be able to The Application of Reinsurance. London: The CII.
explain the importance of evaluating reinsurer security Coursebook 825.
including use of rating agencies.
Additional reading
6.4 Reinsurer failure
Reinsurance. R. L. Carter. 3rd edition. London.
Candidates should be able to
ReActions in association with the Mercantile & General
describe the consequences of reinsurer failure. Reinsurance Company, 1995.
Reinsurance in Practice. R. Kiln. 3rd edition. London:
6.5 Reserve deposits
Witherby, 1991.
Candidates should be able to
Reinsurance Underwriting. R. Kiln and S. Kiln. 2nd edition.
describe the financial considerations regarding reserve London: LLP, 1996.
deposits, including the payment of interest and
Marine Reinsurance. R. H. Brown, P. B. Reed. London:
alternatives to cash deposits.
Witherby, 1981.
6.6 Return on capital
Candidates should be able to Reference materials
discuss the allocation of capital across classes of Reinsurance Principles and Practice. K. Gerathewohl and others.
reinsurance business; Karlsruhe: Verlag Versicherungswirtschaft, 1980-82.
describe the capital requirements for meeting liabilities Reinsurance Clauses. LIRMA. 2nd edition. London: London.
in each reinsurance class; Insurance and Reinsurance Market Association, 1992.
discuss the importance and ways of achieving a return on Reinsurance Law. J. S. Butler and R. M. Merkin. London:
reinsurance capital. Kluwer, 1986.
Reinsurance Practice and the Law. Reinsurance division of
7. Claims Barlow Lyde & Gibert, London: LLP, 1993.
Earthquakes and Volcanic Eruptions: a handbook on risk
7.1 Claims procedures assessment. Zurich: Swiss Reinsurance Company, 1992.
Candidates should be able to Fire and Accident Proportional Treaty Reinsurance. Advanced
describe reinsurance claims procedures in respect of: Study Group report 220 of the Insurance Institute of London.
property reinsurance; Excess of Loss Methods of Reinsurance. Advanced Study Group
report 218 of the Insurance Institute of London.
casualty reinsurance;
The Rating of Pro-rata Treaties. LIRMA.
marine reinsurance;
aviation reinsurance.
Periodicals
7.2 Reserves The Journal. The CII. Six issues a year. Also available online
Candidates should be able to (CII/SOFA members only) at www.cii.co.uk/is
discuss the importance, implications and methods of Insurance Day. LLP Limited.
establishment of reserves for property, casualty, marine Post Magazine. London: Timothy Benn Publishing. Weekly.
and aviation reinsurance. ReActions. London: ReActions Publishing Group. Monthly.
Reinsurance. London: Timothy Benn Publishing. Monthly.
7.3 Commutations
The Review. London: EMAP Media. Monthly.
Candidates should be able to
Catastrophe Reinsurance Newsletter. London: LLP. Monthly.
define commutations and explain when they are used.
Kluwer Insurance & Reinsurance Law Briefing. Kingston upon
7.4 Dispute resolution Thames: Croner. Monthly.
Candidates should be able to Reinsurance Market Report. London: LLP. Weekly.
explain the practical aspects of dispute resolution as Financial Reinsurance & Futures Newsletter. London:
applied to reinsurance claims. LLP. Monthly.
Insurance & Reinsurance Solvency Report. London: LLP.

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The Chartered Insurance Institute 2004
Examination guides
You are strongly advised to study these before the examination.
Please visit www.cii.co.uk to buy online or contact CII Customer
Service for further information on 020 8989 8464.

Exam technique/study skills


There are many modestly priced guides available in bookshops.
You should choose one which suits your requirements.
An example is:
The exam secret: how to make the grade. Barbara Brown.
Tadworth, Surrey: Elliott Right Way Books, 2000.
For a more interactive approach, you should consider:
Winning the brain game. London: The CII, 1996. CD Rom.

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The Chartered Insurance Institute 2004