PGI Reinsurance 1 — Questions and Answers
Question 1: What is the primary purpose of reinsurance for a direct insurer?
- To generate additional profit through premium income
- To spread risk, protect against catastrophic losses, and stabilize underwriting results, enabling acceptance of larger risks (Correct answer)
- To replace the need for direct insurance
- To comply with MAS capital requirements only
Correct answer: To spread risk, protect against catastrophic losses, and stabilize underwriting results, enabling acceptance of larger risks
Reinsurance enables direct insurers to spread risk, protect against catastrophic or unusually large losses, stabilize annual financial results, increase capacity to write larger risks, and manage their capital position.
Question 2: What is a 'quota share' reinsurance treaty?
- A treaty where the reinsurer takes all losses above a fixed amount
- A treaty where the cedant cedes a fixed percentage of every risk to the reinsurer, sharing both premiums and losses proportionally (Correct answer)
- A treaty covering only the largest risks in the portfolio
- A treaty activated only after a catastrophe
Correct answer: A treaty where the cedant cedes a fixed percentage of every risk to the reinsurer, sharing both premiums and losses proportionally
In a quota share treaty, the cedant cedes a fixed percentage of every risk to the reinsurer. Premiums are shared in the same proportion as losses — if 30% is ceded, the reinsurer receives 30% of premiums and pays 30% of all losses.
Question 3: What is a 'surplus lines' reinsurance treaty?
- The same as a quota share treaty
- A proportional treaty where the cedant retains a fixed amount and cedes to the reinsurer any amount above that retention, up to an agreed multiple of the retention (Correct answer)
- A non-proportional treaty protecting against large single losses
- A treaty covering exposures in multiple countries
Correct answer: A proportional treaty where the cedant retains a fixed amount and cedes to the reinsurer any amount above that retention, up to an agreed multiple of the retention
A surplus treaty allows the cedant to retain a fixed amount (one 'line') on each risk and cede the surplus above that retention to the reinsurer, up to an agreed multiple. Larger risks cede more; smaller risks may retain fully.
Question 4: What is 'stop loss' reinsurance?
- Reinsurance that stops losses from exceeding policy limits
- A reinsurance contract that pays when the cedant's total losses for a defined period exceed a stated percentage of earned premium (Correct answer)
- Reinsurance that stops at the cedant's retention level
- A per-risk excess of loss arrangement
Correct answer: A reinsurance contract that pays when the cedant's total losses for a defined period exceed a stated percentage of earned premium
Stop loss reinsurance protects the cedant's overall loss ratio for a defined period. The reinsurer pays when total losses exceed a specified percentage of earned premium, protecting the cedant from catastrophic aggregate losses across the portfolio.
Question 5: What is 'catastrophe excess of loss' reinsurance?
- Reinsurance for any single large loss
- Reinsurance that pays when an accumulation of losses from a single catastrophic event exceeds the cedant's retention (Correct answer)
- Reinsurance for professional indemnity catastrophes only
- The same as per-risk excess of loss
Correct answer: Reinsurance that pays when an accumulation of losses from a single catastrophic event exceeds the cedant's retention
Catastrophe excess of loss (Cat XL) reinsurance responds when a single catastrophic event causes an accumulation of losses across the cedant's portfolio that exceeds the agreed retention, providing protection against event-driven accumulation losses.
Question 6: What is 'ceding commission' in proportional reinsurance?
- A fee charged by MAS for approving reinsurance treaties
- A commission paid by the reinsurer to the cedant, reflecting the cedant's expenses in acquiring and administering the business ceded (Correct answer)
- A penalty charged for exceeding cession limits
- A fee paid by the cedant to access the reinsurance market
Correct answer: A commission paid by the reinsurer to the cedant, reflecting the cedant's expenses in acquiring and administering the business ceded
Ceding commission is paid by the reinsurer back to the cedant to reimburse the cedant's acquisition costs (agent commissions, expenses) for the business being ceded. It reflects that the cedant does the distribution work.
PGI Reinsurance 1
What is the primary purpose of reinsurance for a direct insurer?