Insurance Company Operations, Reinsurance and Solvency
The final domain tests how an insurer is run and kept solvent: governance and administration, reinsurance structures, and capital adequacy under the risk-based regime.
Operations
Board and senior management governance, actuarial, underwriting, policy administration, distribution management, IT and data security, internal audit and compliance, separate accounts for investment-linked products, statutory annual statements, and IC examinations.
Reinsurance
Facultative versus treaty; proportional treaties - quota share (fixed percentage of premium and loss) and surplus share (share of each risk above a retention line); non-proportional covers - per-risk excess of loss, per-occurrence catastrophe layers and aggregate stop loss; ceding commission, retentions, recoverables and retrocession. Reinsurance does not extinguish the insurer's liability to its policyholder: the original insured has no direct claim on the reinsurer.
Solvency
Risk-based capital (RBC2) measures available against required capital, with company action and regulatory control levels triggering intervention; margin of solvency, investment limits and diversification, dividend restrictions and early-warning indicators complete the picture.
Worked example
An insurer writes P100M premium and cedes 40% quota share at a 25% ceding commission. Ceded premium P40M; ceding commission P10M; at a 60% loss ratio, ceded losses P24M. Retained: P60M premium, P36M losses, plus P10M commission income, less expenses. Quota share relieves surplus strain and new-business cost but permanently caps the upside on good business.
Traps
- Confusing quota share with surplus share.
- Thinking reinsurance discharges liability to policyholders.
- Counting recoverables from unauthorised reinsurers as admitted assets without security.