CAS Reinsurance Concepts and Applications

Question 1

What is the primary purpose of reinsurance for a primary insurer?

Accepted Answer

To transfer a portion of risk to another insurer to reduce exposure and stabilize results

Answer

To eliminate underwriting profit volatility entirely

Answer

To replace the primary insurer's capital requirements

Answer

To avoid regulatory oversight of large claims

Question 2

Under a proportional reinsurance treaty, how are premiums and losses shared?

Accepted Answer

Premiums and losses are shared in the same proportion as agreed

Answer

The reinsurer pays all losses above a fixed retention

Answer

The ceding company retains all premiums but shares losses equally

Answer

Losses are shared only if they exceed a minimum threshold

Question 3

Which reinsurance structure pays losses only when they exceed the ceding company's retention?

Accepted Answer

Excess of loss (XOL) reinsurance

Answer

Quota share treaty

Answer

Surplus share treaty

Answer

Facultative proportional reinsurance

Question 4

In a quota share treaty with a 30% cession rate, if a $500,000 loss occurs, how much does the reinsurer pay?

Accepted Answer

$150,000

Answer

$350,000

Answer

$200,000

Answer

$500,000

Question 5

What is a 'ceding commission' in a proportional reinsurance treaty?

Accepted Answer

An amount paid by the reinsurer to the ceding company to cover acquisition and overhead costs

Answer

A fee paid to the broker who arranges the treaty

Answer

The profit margin retained by the primary insurer

Answer

The penalty charged when the ceding company cancels the treaty early

Question 6

What distinguishes facultative reinsurance from treaty reinsurance?

Accepted Answer

Facultative covers individual risks negotiated case-by-case; treaty covers a defined portfolio automatically

Answer

Treaty reinsurance is only available for property lines; facultative covers liability

Answer

Facultative is mandatory; treaty is optional for the ceding company

Answer

Treaty reinsurance has no premium while facultative reinsurance does

Question 7

An aggregate stop-loss reinsurance contract would most likely be used to protect against which scenario?

Accepted Answer

High frequency of small claims leading to adverse aggregate loss ratios

Answer

A single extremely large individual claim

Answer

Losses from a single line of business exceeding an occurrence limit

Answer

Individual risks that exceed the primary insurer's underwriting capacity