Reinsurance Final
Assume an insurance company writes a new policy with an annual premium of $1,500. What unearned premium reserve must be established for this policy?
$1,500.
Suppose an insurer collects $2,000 in premium on a policy it insures. $800 of the premium is seated to the reinsurer. On what amount will the insurer's premium tax liability for this policy be based?
$2,000.
Suppose an insurer has a $2,000,000 surplus. It wants to insure a $400,000 risk. Assuming that a 10% surplus limitation applies, how much of this risk would the insurer have to reinsure to stay within legal limitations.
$200,000. (10% of surplus)
If written premium is $1,200,000, what, at a minimum, must surplus be to produce a desirable relationship between written premium and surplus? Assume the company writes both property and liability insurance.
$400,000. (3:1 ratio)
Suppose the reinsurance premium a ceding company must pay to the reinsurer $1,000. The reinsurer agrees to pay the ceding company a 30% ceding commission, or $300. What amount of premium would the ceding company owe to the reinsurer?
$700.
The ABC Reinsurance Company is incorporated in New Jersey while doing business in New Jersey, ABC Reinsurance is:
A Domestic Company.
The ABC Reinsurance Company is incorporated in New Jersey while doing business in Delaware, ABC Reinsurance is:
A Foreign Company.
The contract used to document a facultative reinsurance agreements is called:
A certificate of facultative reinsurance.
The reinsurer agrees to pay a specified percentage of the original premium, plus a specified percentage of the profit under the treaty. This is an example of:
A contingent commission.
The reinsurer agrees to pay a specified percentage of the original premium. This is an example of:
A flat rate commission.
Under the arbitration clause of a reinsurance contract, who is appointed to settle a dispute between the ceding company and the reinsurer?
A neutral third party.
Which of the following CANNOT be a provider of reinsurance?
A reinsurance broker.
A clause in a reinsurance contract states that the reinsurer will reinsure each risk for an amount not to exceed $100,000. This is an example of:
A reinsurance limit.
A mechanism for providing reinsurance on extrahazardous risks or exposures that are larger than the individual reinsurers could handle is:
A reinsurance pool
The reinsurer will pay a provisional commission that may be increased or decreased in specific increments depending on loss experience under the contract, with the final commission subject to a maximum and minimum. This is an example of:
A sliding scale commission.
The contract used to document a treaty reinsurance agreement is called:
A treaty.
An agreement between a ceding company and a reinsurer that becomes a part of the reinsurance contract and states that certain things will be done or certain conditions will be met is:
A warranty.
Which of the following is NOT one of the characteristics of the direct writing system?
Account executives may place business with many different reinsurers (false).
Which of the following are other names used for the ceding company in reinsurance?
All the above. (Cedent, Primary Company, and Primary Insurer)
Capable Insurance Company wants to find a reinsurer to provide treaty excess of loss insurance on a casualty line of insurance. Which of the following are examples of information Capable Insurance Company will want to know about the reinsurer it chooses?
All the above. (Financial health, whether rates are competitive, and management capabilities)
Which of the following are criteria on which a reinsurer evaluates a ceding company?
All the above. (Integrity of management, underwriting policies, and loss control practices)
Which of the following represents items that may be excluded under a reinsurance contract?
All the above. (Losses caused by specified perils, certain classes of business, and certain types of exposures)
Reinsurance creates greater premium capacity by:
All the above. (Reducing unearned premium reserves, paying commission to the ceding company, and reducing the premiums used in the calculation of the net written premium to surplus ratio)
The amount of the risk that the ceding company does not cede to the reinsurer may be referred to as:
All the above. (Retention, Amount Written Net for its Own Account, and Net Retained Liability)
Which of the following statements are correct regarding self-insurance?
All the above. (The coverage a reinsurer would provide to a self-insurer is known as direct excess, self insurers purchase coverage from reinsurers that protects the self-insurer from a very high level of claims in any one year, and direct excess reinsurance features very high retentions)
Under what circumstance would a ceding company find a reinsurer's underwriting assistance desirable?
All the above. (To write new LOBs, to enter new marketplaces/new geographic areas, and if the ceding company is new or a small business)
Examples of Reinsurers:
All the above. (Upright Insurance Company, a primary insurer, The Mutual Atomic Energy Reinsurance Association, and a Lloyds Syndicate)
Under a pro rata reinsurance agreement:
All the above. (the amount of insurance, premium, commission and losses are shared proportionately, percentages are predetermined, and LAE is also apportioned between the ceding and reinsurer)
DEF Reinsurance is a Canadian-based company that operates in several states, including New Jersey. In New Jersey, DEF Reinsurance is:
An Alien Company
A professional reinsurer is:
Any company whose sole business is reinsurance.
The risk accepted by a reinsurer for the benefit of the reinsured is called:
Assumption.
By increasing size homogeneity reinsurance:
Both increases the spread of risk, and makes losses more predictable.
T/F: Primary insurance companies buy reinsurance, but they do not sell reinsurance. Some private insurers maintain separate reinsurance departments that actively market reinsurance.
Both statements are true.
Suppose the reinsurer, according to the terms of a pro rata treaty reinsurance agreement, reimburses the ceding company for 30% of a loss the ceding company incurs under one of its policies. Later, the ceding company salvages part of the damaged property involved in the loss. Who could benefit from this recovery?
Both the ceding company and the reinsurer.
Definitions for important contract terms may appear in:
Both the definitions section of the contract, and the section of the contract in which they appear.
The risk ceded by the reinsured to the reinsurer is called:
Cession.
Which type of ceding commission provides for a flat percentage of the reinsurance premium plus a percentage of any profit?
Contingent commission.
What type of cancellation provides for the cancellation of reinsurance on primary policies ceded to the treaty of the effective date of cancellation?
Cutoff Cancellation.
A new policy is written, administrative costs associated with the new policy will:
Decrease surplus.
Which of the following statements, with regard to the regulation of the reinsurance industry is correct?
Domestic reinsures must meet state licensing requirements in the state in which they are domiciled.
Suppose the reinsurance agreement provides that the reinsurer will reimburse the ceding company for 90% of losses and loss adjustment expense that the ceding company incurs under the reinsured policy, for losses in excess of $20,000, up to a limit of $100,000. No commission is involved. This is an example of:
Excess of loss reinsurance.
Which of the following statements concerning facultative reinsurance is NOT correct?
Facultative reinsurance is automatic, with the insurer required to cede and the reinsured required to accept, certain risks (False).
An insurer decides it would like to reinsure a very large risk with a reinsurer. It provides information about the risk to a reinsurer so the reinsurer can decide whether or not it will provide reinsurance requested. The reinsurer agrees to provide the reinsurance, and a contract is negotiated. This is an example of:
Facultative reinsurance.
T/F: Alien insurers must be licensed to do business in the United States.
False.
T/F: All alien insurers are subject to the direct regulation by the states in which they do business.
False.
T/F: Because reinsurance is an international business, reinsurance treaties are always applicable worldwide.
False.
T/F: Excess of loss contracts specified at the reinsurance premium will be a portion of the premium charge by the seating company under the contracts of insurance ceded to the treaty.
False.
T/F: Excess of loss treaties generally provide for all losses to be handled on accounts.
False.
T/F: Most of the world's reinsurance premiums are written by primary insurance companies.
False.
T/F: Reinsurance contracts are typically lengthy, complex documents that contain significant amounts of legal terminology.
False.
T/F: Reinsurance is designed to help the insurer and provides no benefits to the original insured because there is no contractual obligation between the insured and the reinsurer.
False. Although not seen, the mere existence of reinsurer benefits the insureds in many ways.
T/F: The reinsurance industry is subject to more stringent regulation than the insurance industry
False. The insurance industry is more regulated.
What does the insolvency clause of a reinsurance treaty generally provide?
If the ceding company becomes insolvent, the reinsurer has an undiminished liability under the reinsurance contract.
The principle of reinsurance that holds that the reinsurer reimburses the ceding company only for actual loss or loss expense sustained is the principle of:
Indemnity.
Which of the following best describes the scope of the reinsurance market?
International.
In a sliding scale commission, the sliding scale specifies the percentage by which the commission will be increased or decreased based on:
Loss ratio.
Can an insured present a claim directly to the reinsurer or to both the insurer and reinsurer?
No.
Dependable Insurers reinsured its homeowners book of business with Substantial Reinsurance. Dependable is later declared in solvent. Substantial reasons that because Dependable will not be able to pay outstanding homeowners claims in full due to its financial condition, and reinsurance is a contract of Indemnity, Substantial obligations for homeowners claims should be based on the amounts Dependable pays. Is this correct?
No.
Does follow the fortunes mean that the reinsurer must reimburse the ceding company for its portion of any loss the ceding company pay with regard to any policy subject to the reinsurance agreement?
No.
If a ceding company were to omit information about a policy ceded to a reinsurer under a reinsurance treaty, would this mean that no reinsurance was applicable?
No.
Protective Inc., a primary insurer, wants to reinsure part of its business to increase premium capacity. Assuming Euro Reinsurance Company has not complied with any specialized state requirements regarding unlicensed alien reinsurers, would Euro be a good choice to reinsure Protective Inc.?
No.
Suppose the reinsurer is uncomfortable with one of the risks ceded under the terms of the treaty. May the reinsure reject this particular risk?
No.
Would the reinsurer be obligated to make a payment to the ceding company for a loss for which the ceding company had refused to reimburse its policyholder.
No.
Why purchase reinsurance?
One reason insurers purchase reinsurance is to protect themselves in the event of unanticipated losses under their contracts of insurance.
The type of reinsurance in which a reinsurer assumes a company's entire book of business for a particular line or geographical area is known as:
Portfolio reinsurance.
Suppose the reinsurance agreement provides that on certain $100,000 risk, 30% or $30,000, of the insurance amount will be ceded to the reinsurer, along with 30% of the original premium. The reinsurer agrees to indemnify the ceding company in meeting its policy obligation for this risk. The reinsurer agrees to pay a 20% ceding commission to the ceding company. This is an example of:
Pro rata reinsurance.
What type of reinsurance agreement states that a specified portion of the original premium (on the primary insurance contract) Will be paid to the reinsurer?
Pro rata.
Reinsurance provides catastrophe relief by:
Protecting the ceding company against an accumulation of losses arising out of a single event.
The practice by which insurers essentially "exchange" reinsurance on portions of each other's business is known as:
Reciprocity. (This is a special reinsurance agreement where companies agree to reinsure each other)
Which of the following is NOT one of the ways in which reinsurers are regulated?
Regulation of policy forms and rates.
Reinsurance helps to stabilize loss experience by:
Reimbursing the ceding company for losses not retained.
Which part of a reinsurance treaty describes the type of reinsurance written under the contract and the obligations of the parties to the contract?
Reinsurance Clause.
A clause in a reinsurance contract states at the ceding company will keep 30% of the insurance amount for its own account. This is an example of:
Retention.
The process by which a reinsurer purchases reinsurance is known as:
Retrocession.
What type of cancellation continues to provide reinsurance on primary policies already reinsured until their natural expiration date?
Runoff Cancellation.
A reinsurance limit places and upper limit on the liability of the:
The Reinsurer.
The reinsurer purchasing the reinsurance is:
The Retrocedent.
The reinsurer providing the reinsurance is:
The Retrocessionaire.
Bumbershoot Insurers contacts a reinsurance intermediary about placing reinsurance on its large book of complex commercial auto risks. The intermediary places the business with several different reinsurers, negotiating contracts with like provisions. The reinsurers pay the intermediary a commission for placing the business with them. This is an example of:
The brokerage market system.
Who pays a premium in exchange for the promise to indemnify the other for certain losses?
The ceding company.
Which of the following statements roughly describes surplus?
The company's written premium minus losses, expenses, and reserves.
The clause that provides that, and the event of the ceding companies insolvency, the payments the reinsurer would owe the ceding company must be paid through the original insured is:
The cut through clause or the assumption certificate.
Bumbershoot Insurers obtains quotes from account executives of two separate reinsurers for reinsuring its book of commercial auto risks. The ceding company selects a reinsurer and works with the account executive to negotiate the final details of the reinsurance contract. This is an example of:
The direct writing system.
Underwriting the underwriter means:
The reinsurer must carefully evaluate a ceding company's financial, underwriting, and management practices before it enters into a contract to reinsure a ceding company's risk.
In the reinsurance transaction, which party promises to indemnify the other for certain losses?
The reinsurer.
What is insurance?
The transaction that protects insureds from losses to their own property or from legal liability arising from their premises or actions is insurance.
What is reinsurance?
The transaction that protects insurers from the financial consequences of insuring others is reinsurance.
Which of the following is NOT an advantage of the direct writing distribution system to a ceding company?
There is access to an array of appropriate facilities.
Which of the following is an example of a reinsurance pool?
Thirty primary insurers have formed an organization to provide reinsurance on product liability risks.
Which of the following statements about these treaties are correct?
Treaties are likely to address similar issues and contain certain provisions in common.
An insurer automatically cedes a portion of its risk under a contract of insurance to a reinsurer with which the insurer has a contract of reinsurance covering risks of this type. The reinsurer must reinsure the risk. This is an example of:
Treaty reinsurance.
T/F: A cut-through endorsement is attached to the primary policy with the permission of the reinsurer providing for the reinsure to become directly liable to the primary insured in the event of the ceding company's solvency.
True.
T/F: Faculty certificates generally incorporate the terms and conditions of the ceding company's original policy.
True.
T/F: In the absence of a special endorsement, the reinsurer cannot be held directly liable to the primary insured because there is no contract between the primary insured and the reinsurer.
True.
T/F: Reinsurance pools are frequently managed by a separate company.
True.
T/F: Under a self insurance clause, the reinsurer agrees to reinsure risks the ceding company self insures, insofar as these risks meet the definition of the reinsured classes under the treaty.
True.
The fact that reinsurance is considered an honorable engagement between two sophisticated and trustworthy parties with a duty to disclose all pertinent information is the principle of:
Utmost Good Faith.
Could Protective Inc. take credit on its financial statement for reinsurance ceded to Euro Reinsurance?
Yes.
Euro Reinsurance Company is an alien reinsurer that is not licensed in any state. Can Euro write reinsurance in the United States?
Yes.
Suppose an insurance company has a surplus of $1,000,000. The state in which this company operates limits the amount of insurance a company can write on a single risk is 10% of the company's surplus. This means that the largest single policy the insurer can write is $100,000. Do you think this limitation is a disadvantage to the insurer?
Yes.