Reinsurance and Risk Transfer
Why reinsurance
Reinsurance transfers part of an insurer's risk to a reinsurer. It increases capacity, protects solvency, stabilises results, and supports catastrophe and large-risk protection. The ceding insurer retains a retention and pays a cession; the reinsurer receives premium and pays recoveries.
Treaty and facultative
Know treaty (automatic cover for a defined class of business) versus facultative (individual, case-by-case). Treaty types include quota share (fixed proportion of premium and losses), surplus (proportional above a retention), excess of loss (non-proportional, covering losses above a retention up to a limit), and stop loss (aggregate protection). Understand reinstatement, layers, attachment points, and aggregate limits.
Key mechanics
Proportional treaties share premium and losses in the same ratio; non-proportional treaties respond only above the attachment point. Reinsurance is a contract between insurers and does not give the original insured direct rights against the reinsurer unless the policy says so. Fronting and cut-through clauses also appear.
Traps and worked example
Examiners test proportional versus non-proportional and confuse a retention with a deductible, though they operate similarly. Watch whether reinsurance is on a losses occurring or risks attaching basis. Worked example: a 90% quota share on a 100,000 premium and 40,000 loss gives the reinsurer 90,000 premium and 36,000 loss, leaving the cedent 10,000 premium and 4,000 loss. Rule of thumb: proportional shares everything; non-proportional pays only the layer above the attachment point.
Insurance Operations
The operating model
Insurance operations span product development, pricing, underwriting, policy administration, premium collection, claims, finance, investments, and customer service. Know the underwriting cycle (soft and hard markets) and how competition, catastrophe losses, and investment returns affect capacity and pricing. Understand the value chain and where cost and service quality are determined.
Financial and management concepts
Know premium income, earned versus written premium, unearned premium reserve, outstanding claims reserve, technical provisions, solvency margin, combined ratio, loss ratio, and expense ratio. The combined ratio below 100% indicates underwriting profit before investment income. Understand asset-liability matching, liquidity, and the role of investments in supporting liabilities.
Technology and service
Operations increasingly use digital channels, automation, and data analytics. Controls include segregation of duties, reconciliation, authorisation limits, and business continuity planning. Outsourcing requires oversight and clear service levels.
Traps and worked example
Examiners test written versus earned premium: written premium is booked when the policy incepts; earned premium is recognised over the policy period. Do not confuse the loss ratio with the combined ratio. Worked example: written premium 1,000,000, earned 750,000, incurred losses 500,000, expenses 250,000. Loss ratio is 500,000/750,000 = 66.7%; combined ratio adds 250,000/750,000 = 33.3%, giving 100%. Rule of thumb: use earned premium as the denominator for underwriting ratios.
Ethics and Professional Conduct
Ethical foundations
Insurance professionals act with integrity, competence, fairness, transparency, and accountability. Ethical duties flow to clients, employers, regulators, and the market. Key concepts include conflicts of interest, confidentiality, suitability of advice, disclosure of remuneration, and treating customers fairly. A conflict must be identified, disclosed, and managed or avoided.
Professional standards
Know the duties of due skill and care, keeping client information confidential, not misleading clients, and not misusing a position for personal gain. Whistleblowing and escalation are expected when wrongdoing is suspected. Records should be accurate and retained. Professional bodies set codes of conduct and disciplinary processes.
Ethical decision-making
Use a structured test: is it legal, is it fair, would I be comfortable if it were public, and does it serve the client's interest? Consider the grey areas examiners favour: accepting gifts, using inside knowledge, recommending a product that pays higher commission, or failing to correct a client's misunderstanding. The correct answer usually favours disclosure and the client's interest over short-term gain.
Traps and worked example
A common trap is choosing the option that is legal but not ethical, or the option that protects the firm rather than the client. Another is assuming confidentiality ends when a client complains; it does not, except where disclosure is required by law or consent. Worked example: an adviser discovers a colleague is churning policies to earn commission. Rule of thumb: report through the proper channel, document the concern, and do not confront or conceal. Integrity is judged by action, not intention.