Risk Management Q
Huge Insurance Company is a property insurer that is interested in protecting itself against cumulative losses that exceed $200 million during the year. This protection can best be obtained using a(n) A) quota-share reinsurance treaty. B) surplus-share reinsurance treaty. C) excess-of-loss reinsurance treaty. D) reinsurance pool.
C
Which of the following statements about the use of a captive insurance company by a parent firm is true? A) The captive may not write outside, non-parent company, business. B) Captives are not permitted to use reinsurance, so any business insured by the captive stays with the captive. C) The captive may be used to insure loss exposures that the parent firm finds it difficult to insure with private insurers. D) Business placed with the captive is always considered retained risk and is never considered transferred risk.
C
ABC Insurance retains the first $1 million of each property damage loss and purchases reinsurance for that part of any property loss that exceeds $1 million. The insurance for property losses above $1 million is called A) excess insurance. B) liability insurance. C) coinsurance. D) primary insurance.
A
ABC Insurance Company entered into a reinsurance agreement with XYZ Reinsurance. Under the contract, XYZ Re has no liability unless ABC's loss ratio exceeds 85 percent for the year. XYZ Re agreed to pay all losses in excess of the 85 percent loss ratio. ABC Insurance Company is using reinsurance to A) stabilize profits. B) reduce the unearned premium reserve. C) provide large risk capacity. D) retire from a line or territory.
A
All of the following are reasons for a primary insurer to use reinsurance EXCEPT A) to increase the unearned premium reserve. B) to increase underwriting capacity. C) to protect against catastrophic losses. D) to stabilize profits.
A
Fly-By-Night Insurance Company had much larger losses than forecast. The company did not charge adequate premiums nor did the company purchase reinsurance. If Fly-By-Night becomes insolvent, which of the following will help pay the unpaid claims of the insurer? A) guaranty fund B) premium rebates C) risk-based capital D) admitted assets
A
All of the following are methods that a property and liability insurance company can use to protect against catastrophic losses EXCEPT A) sale of catastrophe bonds. B) purchase of common stock. C) purchase of excess-of-loss reinsurance. D) quota share reinsurance with a low retention percentage.
B
Which of the following statements about captive insurance companies is (are) true? I. A captive insurance company established by a U.S. company must be domiciled in the United States. II. A captive insurance company may be owned by several parents. A) I only B) II only C) both I and II D) neither I nor II
B
Which of the following statements about treaty reinsurance is true? A) The reinsurer is required to underwrite each individual applicant that is reinsured. B) The reinsurer must accept all business that falls within the scope of the treaty. C) The ceding insurer can choose which business falling within the scope of the treaty it wishes to reinsure. D) It protects the reinsurer by requiring the ceding insurer to charge adequate premiums.
B
Apex Insurance Company wrote a large number of property insurance policies in an area where earthquake losses could occur. When the president of Apex was asked if she feared that a severe earthquake might put the company out of business, she responded, "Not a chance. We transferred most of that risk to other insurance companies." An arrangement by which an insurer that initially writes insurance transfers to another insurer part or all of the potential losses associated with such insurance is called A) hedging. B) speculating. C) reinsurance. D) loss avoidance.
C
One method through which reinsurance is provided is through an organization of insurers that underwrites insurance on a joint basis. Through the organization, financial capacity is available for large commercial risks. This reinsurance arrangement is a(n) A) quota-share treaty. B) surplus-share treaty. C) excess-of-loss treaty. D) reinsurance pool.
D
Which of the following statements about reinsurance is true? A) A reinsurer may not purchase reinsurance. B) The reinsurer is the first insurer that provides claims services to the insured after a loss occurs. C) The amount of insurance transferred to a reinsurer is called the net retention. D) The insurer transferring business to a reinsurer is called the ceding company.
D
Which of the following statements about treaty reinsurance is true? A) Under a surplus-share treaty, 100 percent of the ceding insurer's liability must be transferred to the reinsurer. B) Using a quota-share treaty increases the ceding insurer's unearned premium reserve. C) Under an excess-of-loss treaty, the reinsurer pays losses in full only if they are less than the ceding insurer's retention limit. D) Using a reinsurance pool provides financial capacity to write large amounts of insurance.
D
Methods by which insurers may minimize or avoid catastrophic losses include which of the following? I. The use of reinsurance II. Concentrating coverage written in one geographic region A) I only B) II only C) both I and II D) neither I nor II
A
Delta Insurance Company has a surplus-share treaty with Eversafe Reinsurance. Delta has a retention limit of $200,000, and nine lines of insurance are ceded to Eversafe. How much will Eversafe pay if a $1,600,000 building insured by Delta suffers an $800,000 loss? A) $600,000 B) $700,000 C) $720,000 D) $800,000
B
Granite Insurance Company entered into a treaty reinsurance agreement with Rock Solid Reinsurance (RSR). Granite's retention limit is $400,000 and RSR agreed to provide reinsurance for up to $2.0 million. If Granite writes an $800,000 policy, RSR is responsible for 50 percent of the losses. If Granite insures a $1.6 million risk, RSR is responsible for 25 percent of any losses. What type of reinsurance arrangement did Granite enter into with RSR? A) facultative reinsurance B) surplus share reinsurance C) quota share reinsurance D) excess of loss reinsurance
B
In a reinsurance transaction, the ceding commission is paid by A) the insured to the ceding company. B) the reinsurer to the ceding company. C) the ceding company to the insured. D) the ceding company to the reinsurer.
B
Morris Company self-insures its workers compensation loss exposure. The risk manager of Morris Company is concerned about the possible impact of a single catastrophic claim. She decided to set a retention limit of $500,000 per-claim, and to purchase insurance that will be begin to pay once Morris Company has paid $500,000 on a single claim. The insurance the risk manager purchased is called A) captive insurance. B) excess insurance. C) primary insurance. D) umbrella insurance.
B
New Liability Insurance Company began operations last year and has been very successful. The company's ability to grow is being restricted by an accounting rule that requires insurers to realize acquisition expenses immediately, while not realizing premiums received as income until some time has passed. Reinsurance is often used in such cases for which of the following purposes? A) to stabilize profitability B) to reduce the unearned premium reserve C) to provide protection against catastrophic losses D) to withdraw from a line of business or territory
B
West Coast Insurance writes property and liability insurance in California, Oregon, and Washington. These states are all susceptible to earthquakes. To help determine how much reinsurance to purchase, West Coast Insurance hired an organization to use a computer algorithm to estimate what its insured losses would be if a severe earthquake occurred. West Coast Insurance based its purchase of reinsurance on the loss estimates. This scenario illustrates using A) value-at-risk analysis. B) catastrophe modeling. C) risk mapping. D) a risk management information system.
B
Liability Insurance Company (LIC) was approached by a regional airline to see if LIC would write the airline's liability coverage. LIC agreed to write the coverage and entered into an agreement with a reinsurer. Under the agreement, LIC retains 25 percent of the premium and pays 25 percent of the losses, and the reinsurer receives 75 percent of the premium and pays 75 percent of the losses. This reinsurance arrangement is best described as A) excess-of-loss reinsurance. B) surplus-share reinsurance. C) quota-share reinsurance. D) pool reinsurance.
C
Which of the following statements about reinsurance facilities for insuring high-risk drivers is (are) true? I. Underwriting losses in the reinsurance facility are shared by all auto insurers in the state. II. An insurer must accept all applicants for insurance, but the insurer has the option of placing high-risk drivers in the reinsurance pool. A) I only B) II only C) both I and II D) neither I nor II
C
A reinsurance contract that is entered into on a case-by-case basis after an application for insurance is received by a primary insurer is called A) a reinsurance pool. B) automatic treaty reinsurance. C) retrocession. D) facultative reinsurance.
D
An insurance company that sells earthquake insurance in an area where earthquakes are possible has subjected itself to the risk of insolvency if a severe earthquake occurs. An insurer can safely sell earthquake insurance in this area if it shifts the risk of catastrophic loss to another insurer. The shifting of insured risk from one insurer to another insurer is called A) underwriting. B) casualty insurance. C) coinsurance. D) reinsurance.
D
Catastrophe bonds are made available to institutional investors in the capital markets through an entity that is specially created for that purpose. This is entity is called a A) risk retention group. B) fraternal insurance company. C) captive insurance company. D) special purpose reinsurance vehicle.
D
Members of Mid-South Petroleum Distributors, a trade group, had trouble obtaining affordable pollution liability insurance. The members formed a group captive that is exempt from many state laws that apply to other insurers. This group captive is called a(n) A) reinsurance pool. B) Lloyd's association. C) alien insurer. D) risk retention group.
D