BCP Reinsurance Concepts and Practices 2 — Questions and Answers
Question 1: What is 'quota share' reinsurance?
- The reinsurer pays losses only above a specified per-occurrence deductible
- The reinsurer accepts a fixed percentage of every risk in a portfolio, sharing premiums and losses in that proportion (Correct answer)
- The cedant and reinsurer split losses equally only after aggregate losses exceed a threshold
- The reinsurer provides coverage only for catastrophic events defined in the treaty
Correct answer: The reinsurer accepts a fixed percentage of every risk in a portfolio, sharing premiums and losses in that proportion
In quota share reinsurance, the cedant cedes a fixed percentage of every risk to the reinsurer, with premiums and losses shared in that same fixed proportion throughout the portfolio.
Question 2: How does 'surplus reinsurance' differ from 'quota share' reinsurance?
- Surplus reinsurance applies only to life insurance, while quota share applies to general insurance
- In surplus reinsurance, the cedant retains a fixed monetary amount and cedes only the surplus above that retention (Correct answer)
- Surplus reinsurance requires government approval, while quota share does not
- Surplus reinsurance covers aggregate annual losses, while quota share covers individual occurrences
Correct answer: In surplus reinsurance, the cedant retains a fixed monetary amount and cedes only the surplus above that retention
In surplus reinsurance, the cedant retains a fixed amount (the 'line') on each risk and cedes the surplus above that retention, meaning the cession percentage varies by risk size.
Question 3: What is 'excess of loss' reinsurance?
- A proportional arrangement where losses are shared equally between cedant and reinsurer
- A non-proportional arrangement where the reinsurer pays losses exceeding the cedant's retention up to an agreed limit (Correct answer)
- A type of quota share treaty covering only losses that exceed market average
- An arrangement where the reinsurer pays the cedant a lump sum regardless of actual losses
Correct answer: A non-proportional arrangement where the reinsurer pays losses exceeding the cedant's retention up to an agreed limit
Excess of loss (XL) reinsurance is non-proportional; the reinsurer only pays when a loss exceeds the cedant's agreed retention (deductible) and covers losses up to the reinsurer's liability limit.
Question 4: What is a 'stop loss' reinsurance arrangement?
- A treaty that stops automatically when the cedant's total premium reaches a defined cap
- A non-proportional arrangement where the reinsurer pays when the cedant's aggregate losses in a period exceed a defined percentage of premiums (Correct answer)
- A proportional treaty that limits the reinsurer's share to a maximum number of claims
- An arrangement used exclusively for marine cargo reinsurance in Singapore
Correct answer: A non-proportional arrangement where the reinsurer pays when the cedant's aggregate losses in a period exceed a defined percentage of premiums
Stop loss reinsurance protects the cedant against an adverse overall loss ratio by triggering reinsurer payments when aggregate losses exceed a defined threshold, typically expressed as a percentage of earned premiums.
Question 5: What is a 'ceding commission' in a proportional reinsurance treaty?
- A fee paid by the cedant to MAS for approving the reinsurance arrangement
- A commission paid by the reinsurer to the cedant to cover the cedant's acquisition and administration costs (Correct answer)
- A penalty charged to the cedant if it cedes more risk than agreed in the treaty
- A commission earned by the broker for placing the reinsurance with multiple reinsurers
Correct answer: A commission paid by the reinsurer to the cedant to cover the cedant's acquisition and administration costs
A ceding commission is paid by the reinsurer back to the cedant as a contribution toward the cedant's original acquisition costs (e.g., agent commissions) and administration expenses on the ceded business.
Question 6: Which type of reinsurance would best protect an insurer from a single catastrophic event affecting many policyholders simultaneously, such as a major flood?
- Quota share treaty
- Surplus reinsurance treaty
- Catastrophe excess of loss reinsurance (Correct answer)
- Stop loss reinsurance
Correct answer: Catastrophe excess of loss reinsurance
Catastrophe excess of loss reinsurance is specifically designed to protect insurers against accumulated losses from a single catastrophic event (e.g., flood, earthquake) that triggers many claims at once.
Question 7: What role does a reinsurance broker play in the reinsurance market?
- The reinsurance broker assumes part of the risk alongside the reinsurer
- The reinsurance broker acts as an intermediary, placing reinsurance on behalf of cedants and negotiating terms with reinsurers (Correct answer)
- The reinsurance broker regulates the terms and pricing of all reinsurance treaties in Singapore
- The reinsurance broker provides capital to reinsurers in exchange for a share of premiums
Correct answer: The reinsurance broker acts as an intermediary, placing reinsurance on behalf of cedants and negotiating terms with reinsurers
A reinsurance broker is an intermediary who acts on behalf of the cedant to identify suitable reinsurers, negotiate treaty terms and pricing, and facilitate the placement of reinsurance coverage.
BCP Reinsurance Concepts and Practices 2
What is 'quota share' reinsurance?