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9/34 M97/February 2018 Reinsurance

Question answers

9.1 Most other markets involve the buying and selling of tangible goods that can be inspected and appraised. For
insurance and reinsurance-related products this is not the case, since what is being traded is a promise to pay
in the event a specified occurrence taking place.
9.2 a. Reserves have to be greatly enhanced in order to fund losses, leading to a reduction of capacity and
poorer underwriting results;
b. return on capital becomes less as poor investment returns and low interest rates mean that investment
income can no longer keep up with technical underwriting deficits;
c. the tendency to increase the scope of cover is reversed as tighter controls and more restrictive wordings
are imposed;
d. EML calculations are re-evaluated as the sheer size of such losses means that reinsurers have to
reconsider on what basis they can accept large risks.
9.3 Fees need to be agreed with clients, preferably in advance, to reflect the value to the client of the non-
insurance service provided.
9.4 No, the IUA is a trade and market association and has no involvement or authority over the commercial pricing
decisions of its member companies.
9.5 Although Australia is considered to pose one of the highest bushfire risks in the world, as spectacular as
bushfires appear in media reports, they pose only a relatively small threat to insurers and reinsurers. Despite
increasing development at the bushland/urban fringe, the risk posed to life and property is decreasing, due to
continuous improvements in firefighting techniques and mitigation of the bushfire hazard.
9.6 A fire loss on one floor could possibly affect the floor below, say as a result of water damage, and the floor
above, perhaps through smoke damage, but that the remaining floors of that building would be essentially
unaffected.
9.7 By allowing business to lapse it is accepting decreasing premium volume at a time when operating costs and
administration expenses are static or even increasing. Reference copy for CII Face to Face Training

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Chapter