BCP - Basic Insurance Concepts and Principles Singapore Reinsurance and Co-insurance Questions and Answers — Questions and Answers
Question 1: An insurer in Singapore underwrites a policy for a large, complex industrial risk. To better manage its own financial exposure and solvency margin, the insurer transfers a portion of this risk to another insurance company. What is this practice called?
- Co-insurance
- Reinsurance (Correct answer)
- Subrogation
- Assignment
Correct answer: Reinsurance
Reinsurance is the practice where an insurer (the ceding company) transfers part of its risk portfolio to another insurer (the reinsurer). This is done to reduce the insurer's liability on individual risks, increase its underwriting capacity, and protect against catastrophic losses.
Question 2: A consortium of three Singaporean insurers agrees to underwrite the S$200 million property risk for a new commercial building. Insurer A accepts 50%, Insurer B accepts 30%, and Insurer C accepts 20%. If a valid claim of S$10 million arises from a fire, how much is Insurer C legally obligated to pay the policyholder?
- S$10 million, after which it claims contributions from A and B.
- S$3.33 million, as the loss is divided equally.
- S$2 million, based on its agreed share. (Correct answer)
- Nothing, as the lead insurer (Insurer A) is solely responsible for payment.
Correct answer: S$2 million, based on its agreed share.
In a co-insurance arrangement, each insurer is severally (individually) liable for its pre-agreed percentage of the risk. Therefore, Insurer C is only liable for its 20% share of the S$10 million loss, which amounts to S$2 million.
Question 3: An underwriter at a Singapore-based insurance company is presented with a unique, high-value risk that is not covered under its existing automatic reinsurance agreements. The underwriter needs to secure reinsurance for this specific risk on a case-by-case basis. Which type of reinsurance should be sought?
- Treaty Reinsurance
- Facultative Reinsurance (Correct answer)
- Retrocession
- Surplus Share Reinsurance
Correct answer: Facultative Reinsurance
Facultative reinsurance is negotiated separately for each individual risk that the ceding insurer wishes to reinsure. This is distinct from treaty reinsurance, which is an obligatory agreement where the reinsurer automatically accepts all risks within a pre-defined class of business.
Question 4: A policyholder, SG Enterprises, has a fire insurance policy with Insurer X. Unknown to SG Enterprises, Insurer X has reinsured 40% of the risk with Reinsurer Y. Following a major fire, SG Enterprises submits a claim. What is the correct procedure for the claim?
- SG Enterprises must claim 60% from Insurer X and 40% directly from Reinsurer Y.
- SG Enterprises must claim the full amount from Insurer X. (Correct answer)
- SG Enterprises must claim the full amount from Reinsurer Y.
- SG Enterprises must submit the claim to the General Insurance Association (GIA) to apportion the loss.
Correct answer: SG Enterprises must claim the full amount from Insurer X.
The legal principle of privity of contract applies. The policyholder's contract is solely with the direct insurer (Insurer X). There is no contractual relationship between the policyholder and the reinsurer. Therefore, Insurer X is responsible for paying the full claim to SG Enterprises and will then seek recovery of the reinsured portion from Reinsurer Y.
Question 5: Which of the following is a primary distinction between co-insurance and reinsurance in the Singapore insurance market?
- Reinsurance involves multiple insurers sharing a risk from inception under a single policy, while co-insurance is insurance for an insurer.
- Co-insurance is mandatory under the Insurance Act for risks over S$100 million, while reinsurance is optional.
- In co-insurance, the policyholder is aware of all participating insurers, whereas in reinsurance, the policyholder typically only deals with the direct insurer. (Correct answer)
- Reinsurance is handled by the Singapore Reinsurers' Association, while co-insurance is exclusively managed by the General Insurance Association (GIA).
Correct answer: In co-insurance, the policyholder is aware of all participating insurers, whereas in reinsurance, the policyholder typically only deals with the direct insurer.
In a co-insurance arrangement, all participating insurers are party to the original contract and are typically listed on the policy schedule. In reinsurance, the arrangement is a separate contract between the ceding insurer and the reinsurer, and the original policyholder is not a party to it and may not even be aware of its existence.
Question 6: In a large co-insurance arrangement for a major infrastructure project in Singapore, one insurer is designated as the 'lead insurer'. What is the primary function of this lead insurer?
- To assume 100% of the risk and then reinsure it with the other co-insurers.
- To act as the sole regulatory contact with the Monetary Authority of Singapore (MAS) for the group.
- To guarantee the payments of any co-insurer that might default on a claim.
- To handle administration, issue policy documents, and manage claims on behalf of the co-insuring group. (Correct answer)
Correct answer: To handle administration, issue policy documents, and manage claims on behalf of the co-insuring group.
The lead insurer in a co-insurance placement takes on key administrative duties. This includes negotiating terms, issuing the policy documentation, collecting the premium to be distributed, and processing claims for the entire group. However, each co-insurer remains individually responsible for its share of the claim.
BCP - Basic Insurance Concepts and Principles Singapore Reinsurance and Co-insurance Questions and Answers
An insurer in Singapore underwrites a policy for a large, complex industrial risk.
To better manage its own financial exposure and solvency margin, the insurer transfers a portion of this risk to another insurance company.
What is this practice called?