A major coastal municipality requires a $200 million catastrophe insurance program. To manage this massive exposure, multiple entities are involved in sharing the risk. Arrange the following events in the correct chronological order, demonstrating the standard flow of risk transfer and subsequent claims handling in a multi-tiered reinsurance arrangement.
- 1The municipality purchases a primary catastrophe insurance policy from Coastal Mutual.
- 2Coastal Mutual retains a portion of the risk and cedes the remainder to Global Re.
- 3Global Re transfers a portion of its newly assumed risk to Apex Retro Re.
- 4Following a catastrophic hurricane, the municipality files a claim solely with Coastal Mutual.
- 5Coastal Mutual pays the municipality's claim and subsequently seeks indemnification from Global Re.
Answer
The correct sequence begins with the primary policy purchase, followed by the primary insurer ceding risk to a reinsurer, the reinsurer ceding risk to a retrocessionaire, the insured filing a claim with the primary insurer, and finally the primary insurer paying the claim and seeking indemnification.
The sequence accurately reflects the mechanics of multi-tiered risk transfer and claims handling. First, a primary policy must be issued. Second, the primary insurer cedes risk to a reinsurer. Third, the reinsurer may cede its risk to a retrocessionaire. When a loss occurs, the insured files the claim exclusively with the primary insurer due to privity of contract. Finally, the primary insurer pays the claim and seeks indemnification from its reinsurer.
Step-by-Step Solution
Key Concept
Reinsurance Risk Flow and Privity of Contract