CU CU Reinsurance and Portfolio Management 1 — Questions and Answers
Question 1: What is the primary purpose of reinsurance for a primary insurer?
- To replace primary coverage entirely
- To transfer a portion of risk and stabilize loss experience (Correct answer)
- To avoid state regulatory requirements
- To increase premium income without liability
Correct answer: To transfer a portion of risk and stabilize loss experience
Reinsurance allows primary insurers to transfer portions of their risk to reinsurers, stabilizing loss ratios and protecting surplus.
Question 2: In a quota share reinsurance treaty, how is premium shared between the cedent and reinsurer?
- Based on individual loss severity
- According to a predetermined fixed percentage of each risk (Correct answer)
- Only after the cedent retains a set dollar amount
- Proportional to the reinsurer's surplus
Correct answer: According to a predetermined fixed percentage of each risk
Quota share treaties allocate a fixed percentage of every premium and corresponding loss to the reinsurer.
Question 3: Which reinsurance arrangement requires the cedent to offer and the reinsurer to accept every risk within defined parameters?
- Facultative obligatory
- Facultative facultative
- Obligatory treaty (Correct answer)
- Surplus lines
Correct answer: Obligatory treaty
Under an obligatory treaty, the cedent must cede and the reinsurer must accept all risks that fall within the treaty's scope.
Question 4: An excess-of-loss reinsurance agreement triggers reimbursement when:
- Aggregate premiums exceed the treaty limit
- A single loss exceeds the cedent's retention level (Correct answer)
- The cedent's surplus falls below minimum capital
- Annual losses exceed prior-year averages
Correct answer: A single loss exceeds the cedent's retention level
Excess-of-loss (XL) reinsurance responds once an individual loss surpasses the agreed retention, with the reinsurer covering the excess.
Question 5: What does the term 'cession' mean in a reinsurance context?
- Canceling a reinsurance contract
- The amount of risk transferred by the cedent to the reinsurer (Correct answer)
- A tax classification for reinsurance premiums
- The reinsurer's claim payment
Correct answer: The amount of risk transferred by the cedent to the reinsurer
A cession is the specific portion of risk (and corresponding premium) that the primary insurer transfers to its reinsurer.
Question 6: Aggregate stop-loss reinsurance protects the cedent against:
- A single catastrophic event exceeding its per-occurrence limit
- Cumulative losses exceeding a specified percentage of premiums over a period (Correct answer)
- Insolvency of the primary insurer
- Regulatory penalties for under-reserving
Correct answer: Cumulative losses exceeding a specified percentage of premiums over a period
Aggregate stop-loss coverage activates when the cedent's total losses for a period exceed an agreed threshold, usually expressed as a loss ratio.
CU CU Reinsurance and Portfolio Management 1
What is the primary purpose of reinsurance for a primary insurer?