THE CHARTERED INSURANCE INSTITUTE. Read the instructions on page 3 carefully before answering any questions.

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1 THE CHARTERED INSURANCE INSTITUTE P97 Diploma in Insurance Unit P97 Reinsurance April 2012 examination Instructions Three hours are allowed for this paper. Do not begin writing until the invigilator instructs you to. Read the instructions on page 3 carefully before answering any questions. Provide the information requested on the answer book and form B. You are allowed to write on the inside pages of this question paper, but you must NOT write your name, candidate number, PIN or any other identification anywhere on this question paper. The answer book and this question paper must both be handed in personally by you to the invigilator before you leave the examination room. Failure to comply with this regulation will result in your paper not being marked and you may be prevented from entering this examination in the future. 2026

2 The Chartered Insurance Institute

3 Unit P97 Reinsurance Instructions to candidates Read the instructions below before answering any questions Three hours are allowed for this paper which carries a total of 200 marks, as follows: Part I 14 compulsory questions 140 marks Part II 2 questions selected from 3 60 marks You should answer all questions in Part I and two out of the three questions in Part II. You are advised to spend no more than two hours on Part I. Read carefully all questions and information provided before starting to answer. Your answer will be marked strictly in accordance with the question set. The number of marks allocated to each question part is given next to the question and you should spend your time in accordance with that allocation. You may find it helpful in some places to make rough notes in the answer booklet. If you do this, you should cross through these notes before you hand in the booklet. It is important to show each step in any calculation, even if you have used a calculator. If you bring a calculator into the examination room, it must be a silent battery or solar-powered non-programmable calculator. The use of electronic equipment capable of being programmed to hold alphabetic or numerical data and/or formulae is prohibited. You may use a financial or scientific calculator, provided it meets these requirements. Answer each question on a new page. If a question has more than one part, leave six lines blank after each part PTO

4 PART I Answer ALL questions in Part I Note form is acceptable where this conveys all the necessary information 1. Explain briefly: (a) the proportional method of reinsurance; (2) (b) the non-proportional method of reinsurance; (2) (c) three advantages and three disadvantages to the reinsured of using a proportional method compared to a non-proportional method. (6) 2. Identify three factors that influence an insurer in the selection of its retention for its portfolio of business. (6) 3. Explain the main factors that affect the price of non-proportional energy reinsurance. (14) 4. Explain the characteristics of losses occurring during a basis of cover clause, and the difficulties this could pose to a reinsured. (10) 5. (a) State two examples of occupational diseases. (2) (b) Explain the difficulties occupational diseases have on the management of employers liability reinsurance portfolios. (8) (c) Explain briefly how the reinsurance industry dealt with these difficulties. (4) 6. Describe the impact a major market loss may have on reinsurance treaty terms and conditions. (8) 7. List eight external factors that affect the purchase of reinsurance. (8)

5 8. (a) Explain what is identified in a Law and Jurisdiction Clause. (3) (b) Explain the difficulties that may arise if this clause is not included in a reinsurance contract and how the courts deal with these. (6) 9. Describe the services a reinsurance broker provides to its clients (the reinsureds). (14) 10. Explain, with an example, what clash excess of loss cover is and how it would benefit a reinsured. (9) 11. Identify five main types of energy risks that can be covered by (re)insurers. (10) 12. List eight requirements that a successful international reinsurance centre would need to have, according to Eric Herve-Bazin. (8) 13. Explain, with an example, the reasons why a reinsured may purchase excess of loss in addition to a quota share treaty. (10) 14. Summarise five features that are taken into consideration when calculating the excess of loss premiums for a property catastrophe programme. (10) Questions continue over the page PTO

6 PART II Answer TWO of the following THREE questions Each question is worth 30 marks 15. A ceding company has the following fire reinsurance programme: 40% quota share, maximum 30,000 any one risk for 100%, maximum cession to quota share is 12,000 any one risk. 8 line gross first surplus, maximum cession 240,000 any one risk. 5 line gross second surplus, maximum cession 150,000 any one risk. Proportional facultative placements where necessary. (a) State the difference between a quota share treaty and a surplus treaty. (5) (b) Calculate: the liability (sums insured); the premium; the loss; to each section of this reinsurance programme for the following two risks: Risk A Risk B Sum insured 400, ,000 Premium 5,000 8,000 Loss 350,000 20,000 Use this table template to record your calculations in your answer booklet: (25) Sum insured Cedant s net retention Quota share First surplus Second surplus Facultative Risk A Risk B Premium Cedant s net retention Quota share First surplus Second surplus Facultative Loss Cedant s net retention Quota share First surplus Second surplus Facultative

7 16. An insurance company purchases the following per risk excess of loss program: The treaty limit of 300,000 excess of 200,000. Deposit premium of 28,500 with a minimum premium of 20,000. Burning cost adjusted at 100/70, subject to a minimum rate of 2% and a maximum of 6%. There is one reinstatement pro rata as to amount. The original gross net premium income is 1,000,000. Calculate, showing all your workings, the adjustment premium and reinstatement premium due under the following circumstances. (a) No losses. (5) (b) One loss at 215,000 from ground up. (8) (c) One loss at 228,000 from ground up. (8) (d) Two losses, each at 230,000 from ground up. (9) 17. The underwriting results of the Hemisphere Insurance Company s risk excess of loss treaty for the past five years were as follows. Year Gross premium including reinstatement premium Claims (paid & outstanding) Result , , , , , , , , , , ,000 50, , , ,000 2,850,000 2,700, ,000 Reinsurance brokerage 10%. Hemisphere Insurance Company was surprised to learn from its reinsurance broker that its reinsurers were not satisfied with the result, and would require the renewal premium to increase in order to achieve a more favourable underwriting result. (a) Summarise the factors the reinsurance underwriter would take into account when reviewing the treaty in order to determine whether the underwriting result was acceptable. (20) (b) Discuss options the broker could suggest to Hemisphere Insurance Company to consider if they wish to continue purchasing a risk excess of loss program. (10)

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