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 October 2014 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. 4672

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 the purpose and operation of sidecars. (8) 2. Differentiate seven features between proportional and non-proportional methods of treaty reinsurance. (14) 3. Explain the significance of Hill & Others v Mercantile and General Reinsurance Co. (1996) in the settlement of losses on reinsurance treaties. (6) 4. (a) State three reasons why an insurer would decide to reinsure on a facultative excess of loss basis. (3) (b) State three factors that might influence the insurer s retention on a facultative excess of loss placement. (3) 5. Explain five advantages and five disadvantages of a surplus treaty to the reinsured. (10) 6. XYZ Insurance Company has a 50% quota share for its property portfolio which is exposed to windstorm losses. There is a maximum cession of 3million any one risk. An event limit of four times the single risk limit was imposed by the reinsurers. A windstorm affected six of the risks that were ceded up to the single risk limit. (a) Calculate: (i) (ii) (iii) The reinsurance recovery taking into account the application of both cession and event limits. (2) The recovery that would have been possible had the event limit not been in place. (2) The recovery if the six risks had been affected by separate losses rather than one event. (2) (b) State the difference between a cession limit and an event limit. (2)

5 7. Outline the features of the following types of excess of loss treaty: (a) (b) (c) Clash. Buffer. Top and drop. (3) (3) (3) 8. Describe briefly four basic components of a model used to measure and manage natural perils catastrophe risk. (12) 9. Explain the features, use and effect of a special termination clause. (10) 10. (a) Outline the reasons for the main exclusions used in treaties. (8) (b) List six common treaty exclusions. (6) 11. Describe the five key elements in successful reinsurance cycle management. (15) 12. Explain how property excess of loss premiums are calculated using the: (a) Burning cost method. (5) (b) Exposure method. (4) 13. Outline a reinsurer s differing information requirements when writing a motor treaty on a: (a) Proportional basis. (5) (b) Non-proportional basis. (5) QUESTIONS CONTINUE OVER THE PAGE PTO

6 14. In relation to a marine liability portfolio: (a) Identify three different types of risks covered. (3) (b) Explain briefly, with an example, how accumulations can arise. (3) (c) Identify the most suitable type of reinsurance. (3)

7 Part II questions can be found on pages 8, 9 and PTO

8 PART II Answer TWO of the following THREE questions Each question is worth 30 marks 15. A ceding company has the following reinsurance programme for its property portfolio: 1. 40% quota share, maximum USD 30,000 any one risk for 100%. The maximum cession to the quota share is USD 12,000 any one risk. 2. Eight line gross First Surplus, maximum cession USD 240,000 any one risk. 3. Five line gross Second Surplus, maximum cession USD 150,000 any one risk. 4. Three line gross Facultative/Obligatory maximum cession USD 90,000 any one risk. 5. Facultative placements where necessary. Calculate, using the table on page 8 as a template which you should copy into your answer booklet and record your calculations there, the: sums insured; the premium; and loss to each section of this programme for the following three risks: Risk A Risk B Risk C Sum insured 240, , ,000 Premium 2,400 5,500 8,000 Loss 8, ,000 20,000 Marks awarded (8) (10) (12) (30)

9 Sum insured Cedant s net retention Quota share cession First Surplus cession Second Surplus cession Facultative/Obligatory cession Facultative cession Premium (rounded to the nearest USD) Cedant s retained premium Premium ceded to quota share Premium ceded to First Surplus Premium ceded to Second Surplus Premium ceded to Facultative/Obligatory Premium ceded to Facultative placement Losses Cedant s retained share of loss Loss to Quota share Loss to First Surplus Loss to Second Surplus Loss to Facultative/Obligatory Loss to Facultative Placement A B C A B C A B C QUESTIONS CONTINUE OVER THE PAGE PTO

10 16. A fire insurance company has the following reinsurance programme in place: 1. Non-proportional treaty cover of USD 30,000 excess of USD 20, One reinstatement at 100% pro-rata as to amount. 3. Deposit premium of USD 28,500, minimum premium of USD 20, Rated on burning cost adjusted at 100/70, subject to a variable rate with minimum 2% - maximum 6%. 5. The original gross net premium income is USD 1,000,000. Calculate, showing all your workings, the adjustment premium and reinstatement premium due under the following situations: (a) No losses. (4) (b) One loss at USD 35,000 from ground up. (8) (c) One loss at USD 48,000 from ground up. (8) (d) Two losses, each at USD 50,000 from ground up. (10) 17. Discuss the reinsured s main considerations and objectives when designing and creating a reinsurance programme for its portfolio of business. (30)

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