Reinsurance and Risk Transfer
Reinsurance basics
Understand facultative and treaty reinsurance, proportional (quota share, surplus) and non-proportional (excess of loss, stop loss). Know the concepts of retention, cession, reinstatement and the role of retrocession.
Key concepts
Understand the reinsurance contract terms: follow the fortunes, follow the settlements, and the duty of utmost good faith. Know the treatment of claims, the role of the reinsurer in claims handling, and the effect of insolvency of the reinsurer.
Traps
Questions often test whether a reinsurer is liable to the original insured (usually not, due to privity). Another trap is confusing quota share with surplus, or excess of loss with stop loss. Understand that reinstatement of reinsurance cover may require an additional premium.
Worked example
An insurer retains the first 1m and buys 4m excess of loss. A 3m loss is borne by the insurer up to 1m, with 2m recovered from the reinsurer. Rule of thumb: excess of loss responds above the retention.
Insurance Business Operations
Operations
Understand the value chain: product design, distribution, underwriting, policy administration, claims, finance and reinsurance. Know the roles of the managing general agent, broker and coverholder, and the importance of delegated authority controls.
Financial and operational controls
Understand solvency capital, technical provisions, and the role of the actuarial function. Know the importance of data quality, systems controls and business continuity. Understand the treatment of premium, credit risk and the role of the finance function.
Traps
Questions often test the responsibilities of the MGA versus the insurer, or the treatment of premium held by brokers. Another trap is the distinction between technical provisions and solvency capital.
Worked example
An MGA binds risks on behalf of an insurer. The insurer remains responsible for the underwriting and claims, and must monitor the MGA's delegated authority. Rule of thumb: delegated authority does not delegate regulatory responsibility.
Ethics and Professional Conduct
Ethical framework
Understand the core ethical principles: integrity, competence, fairness, transparency and accountability. Know the role of the professional body's code of conduct and the requirement to act in the client's best interests where applicable.
Conduct in practice
Understand conflicts of interest, inducements, commission disclosure and the treatment of vulnerable customers. Know the requirements for whistleblowing and the handling of complaints. Understand the balance between commercial pressure and ethical duties.
Traps
Questions often test whether a gift or inducement is acceptable, or whether a conflict must be disclosed. Another trap is the treatment of confidential information and the duty to report breaches.
Worked example
A broker is offered a holiday by an insurer. The broker should decline or disclose the inducement in line with the firm's policy. Rule of thumb: if it could influence a decision, disclose it.