Difficult Questions

1. The 'nine-month rule,' developed by the National Association of Insurance Commissioners (NAIC), applies to the a. Payment of reinsurance premium. b. Delivery of a broker of record letter. c. Payment of covered losses. d. Signing of reinsurance agreements.

d. Signing of reinsurance agreements.

3. Which one of the following best explains why an attachment point is likely to be set sufficiently high by a reinsurer? a. To keep the primary insurer's cost of the treaty within reasonable means. b. So that no claims ever reach the aggregate reinsurer's level. c. To maintain integrity in the reinsurance program for the primary insurer. d. So that primary insurers have a significant stake in efficiently managing claims.

d. So that primary insurers have a significant stake in efficiently managing claims.

5. The basic purpose of the claims and loss adjustment expense clause in a casualty XOL treaty is that it a. Provides the reinstatement of premium when the reinsurer settles a loss. b. Provides the automatic reinstatement of the per occurrence limit after a loss has been paid. c. Sets the ultimate net loss that the primary insurer will be responsible for. d. States the circumstances under which the primary insurer must report claims.

d. States the circumstances under which the primary insurer must report claims.

5. The three-part combination method of setting loss reserves combines the loss ratio method, the loss triangle method, and a. Case loss reserves. b. Allocated loss adjustment expenses. c. Judgement. d. The Bornhuetter-Ferguson method.

a. Case loss reserves.

14.) Surplus share reinsurance is useful when the primary insurer a. Needs to increase its large line capacity b. Wants to withdraw from a market segment. c. Has a significant liability catastrophe exposure. d. Needs surplus relief.

a. Needs to increase its large line capacity

1. A small primary insurer may purchase an aggregate excess of loss treaty a. To protect its policyholder surplus. b. To limit individual losses to a predetermined level. c. To establish its probable maximum loss. d. To increase its large line capacity.

a. To protect its policyholder surplus.

9. DEF Insurance Company is in the market to purchase reinsurance to obtain surplus relief. Based on their current financial information of $25 million in written premium and $5 million in policyholders' surplus, DEF estimates that its capacity ratio at year end will be 5 to 1. Which one of the following represents the quota share percentage needed to strengthen the capacity ratio to 3 to 1? a. 30% b. 40% c. 50% d. 60%

b. 40%

1. For most property-casualty insurers the largest admitted assets are a. Reinsurance recoverables. b. Cash Equivalents. c. Investment securities. d. Short term investments.

c. Investment securities.

10. The liability amount ceded to a reinsurer under a surplus share treaty is known as which one of the following? a. Surplus cession. b. Surplus share. c. Surplus liability. d. Excess Liability.

c. Surplus liability.

1. An audit conducted by a reinsurer before committing to a new relationship is called a. A relationship audit. b. An at risk audit. c. An in-force audit. d. A pre-quote audit.

d. A pre-quote audit.

4. ABC Insurer has a $200,000 xs $100,000 treaty with Reinsurer. ABC is insolvent, and the liquidator settled a $100,000 case for $50,000. If the reinsurance treaty contains an insolvency clause, what is the amount recoverable from Reinsurer? a. 0 b. 50,000 c. 100,000 d. 200,000

a. 0

7. Based on the data below, what is the surplus relief effort? Ceded written premiums $50 million Ceded earned premiums $40 million Provisional commission 20% a. 2,000,000 b. 8,000,000 c. 10,000,000 d. 18,000,000

a. 2,000,000

10. An insurer and reinsurer enter into a 75% quota share treaty. The treaty provides for ceding and profit-sharing commissions. The insurer estimates $16,000,000 in premium subject to the treaty. The ceding commission is 20% and the profit-sharing commission is 50%. The reinsurer projects 10% for costs and minimum profit and 60% for loss and loss adjustment expenses. Based on the information given, what is the estimated amount of the insurer's profit-sharing commission? a. 600,000 b. 800,000 c. 1,200,000 d. 1,600,000

a. 600,000

5. A primary insurer which needs facultative reinsurance to support a policy it plans to issue, obtains a binder, which is a. A temporary agreement subject to a satisfactory primary policy review. b. An offer by the reinsurer to reinsure the loss exposure. c. An authorization to issue the policy. d. A final reinsurance agreement specifying all terms, conditions and exclusions.

a. A temporary agreement subject to a satisfactory primary policy review.

7. When Reinsurance Company (ReC) audits Primary Insurance Company (PIC) to verify the accuracy of the premium, loss and commission data that PIC has reported to ReC it is most accurately referred to as a. A transactional audit. b. An underwriting audit. c. A claim audit. d. A reinsurance audit.

a. A transactional audit.

3. Disputes over the determination of an occurrence have led to the addition of a specific definition in the casualty excess of loss reinsurance treaty. Which one of the following is the best example of this definition? a. All losses in a continuous 12-month period from the same event. b. All losses that arise from one sudden and accidental event. c. All losses traceable to one sudden event that results in similar loss. d. All losses that arise from any operation attributed to a single event.

a. All losses in a continuous 12-month period from the same event.

2. An insurer that a state insurance department has granted a license to sell insurance is best referred to as a. An admitted insurer. b. A domestic insurer. c. An alien insurer. d. An accredited insurer.

a. An admitted insurer.

7. Which one of the following statements about factors that affect reinsurance losses is most accurate? a. An excess of loss reinsurer's losses are affected by monetary inflation to a greater extent than a primary insurer's losses. b. Because excess of loss reinsurance claims tend to be paid quickly, they are more affected by social inflation than monetary inflation. c. Social inflation refers to the tendency for legislative changes to reduce payments to claimants and ultimately reduce reinsurance losses. d. A pro rata reinsurer's losses are affected by monetary inflation to a greater extent than an excess of loss reinsurer's losses.

a. An excess of loss reinsurer's losses are affected by monetary inflation to a greater extent than a primary insurer's losses.

1. Which one of the following best defines authorized insurer? a. An insurer to which a state has granted a license to sell insurance. b. An insurer with a capacity ratio of 3 to 1 or lower. c. An insurer that has had its rates and forms approved. d. An insurer incorporated in the state it is selling insurance.

a. An insurer to which a state has granted a license to sell insurance.

6. Which one of the following statements about salvage and subrogation is most accurate? a. Anticipated salvage is a reduction to loss reserves and reduces the liability that the insurer reports on its balance sheet. b. Subrogation amounts are collected from the insured when they are at fault to a third party for an insured loss. c. Subrogation recoveries are used to reduce the insured's premium payments in the year they are recovered. d. Salvage recoveries reduce paid losses in the year in which the original loss occurred even though they are received in a subsequent year.

a. Anticipated salvage is a reduction to loss reserves and reduces the liability that the insurer reports on its balance sheet.

3. Part 1 and Part 1B of the Underwriting and Investment Exhibit of the National Association of Insurance Commissioners (NAIC) Annual Statement list all types of insurance an insurer could sell. Which one of the following would be included in these Parts? a. Assumed and ceded reinsurance. b. Losses paid and incurred annually by the primary insurer c. Capital and surplus maintained by the primary insurer. d. Loss and loss adjustment expense reserves of the primary insurer.

a. Assumed and ceded reinsurance.

3. Primary Insurance Company (PIC) has a large book of first party automobile policies. Which one of the following would be the best method for PIC to reserve collision losses that arise from the resulting claims? a. Average method. b. Bulk method. c. Tabular method. d. Judgement method.

a. Average method.

12.) Clash coverage limits should be set by considering all of the following, EXCEPT: a. Catastrophe excess of loss reinsurance purchased by the primary insurer. b. Policy limits offered by the primary insurer. c. Potential for excess of policy limit losses. d. Potential for multiple primary policies to be involved in a single occurrence.

a. Catastrophe excess of loss reinsurance purchased by the primary insurer.

4.) Clash coverage limits should be set by considering all of the following except a. Catastrophe excess of loss reinsurance purchased by the primary insurer. b. Potential for excess of policy limits losses. c. Potential for multiple primary policies to be involved in a single occurrence. d. Policy limits offered by the insurer.

a. Catastrophe excess of loss reinsurance purchased by the primary insurer.

3. When primary insurers use reciprocal quota share treaties with other primary insurers to minimize their concentration of loss exposures in a single geographic area, the reinsurance is being used to provide a. Catastrophe protection. b. Underwriting guidance. c. Withdrawal from a market segment. d. Additional large line capacity.

a. Catastrophe protection.

4. Insurers provide extensive information about their reinsurance transactions in Schedule F of the NAIC Annual Statement. Which one of the following best explains why this information is included with the NAIC Annual Statement? a. Concern as to whether primary insurers can collect reinsurance amounts. b. So that statutory accounting principles can be applied to the data. c. So that the NAIC can enact model laws. d. The format required by the NAIC for financial reporting.

a. Concern as to whether primary insurers can collect reinsurance amounts.

5. When establishing a price for reinsurance by either of the two main approaches, a loss cost rate is developed. This rate includes which one of the following? a. Expected Losses. b. Loss adjustment expenses. c. A catastrophe charge. d. Profit and Contingencies.

a. Expected Losses.

6. Which one of the following is a method of pricing excess of loss reinsurance treaties that has as a goal to determine a loss cost rate for a future period that is based on actual past losses and the related subject premiums? a. Experience rating. b. Trend Rating. c. Exposure Rating. d. Retention and limits rating.

a. Experience rating.

5. Which one of the following is true regarding the use of limits in quota share reinsurance? a. Including a per occurrence limit usually results in a higher ceding commission than if no such limit is included. b. If the reinsurance treaty covers two or more types of insurance, the maximum limit will be the same for each type. c. The maximum limit allowed usually has no effect on the amount of the ceding commission the reinsurer will pay. d. Limiting the amount of insurance the primary insurer can cede generally results in a higher ceding commission percentage.

a. Including a per occurrence limit usually results in a higher ceding commission than if no such limit is included.

4. Which one of the following statements regarding the calculation of the reserve for unallocated loss adjustment expenses (ULAE) is accurate? a. It is usually estimated as a percentage of the sum of incurred losses and allocated loss adjustment expenses. b. It is difficult to estimate the total amount of ULAE to be paid in a given year at the beginning of that year. c. It is usually estimated as a percentage of incurred but not reported (IBNR) losses. d. It is usually estimated as a percentage of the allocated loss adjustment expenses.

a. It is usually estimated as a percentage of the sum of incurred losses and allocated loss adjustment expenses.

2. Which one of the following is an advantage of a surplus share reinsurance treaty? a. It permits the primary insurer to vary the retention for each loss exposure. b. The primary insurer has a fixed percentage of all losses. c. Every loss that occurs that is within the treaty is subject to cession. d. The reinsurer receives a fixed amount of premium for each loss exposure.

a. It permits the primary insurer to vary the retention for each loss exposure.

2. The IIA Insurance Company has a property per risk excess of loss reinsurance treaty with Reinsurer. The retention and limits clause contains an annual aggregate deductible. Which one of the following best explains how the annual aggregate deductible operates? a. Losses between the attachment point and the reinsurance limit are aggregated and apply to the aggregate deductible. b. Losses below the attachment point are accumulated and retained until the total reaches the aggregate deductible. c. Losses that exceed the reinsurer's limit all apply to the aggregate deductible for the reinsurance policy to respond to. d. Losses in total are accumulated throughout the year and the aggregate deductible is applied at the end of the year.

a. Losses between the attachment point and the reinsurance limit are aggregated and apply to the aggregate deductible.

2. A primary insurer moves its quota share reinsurance treaty from one reinsurer to another. The incoming reinsurer demands that the primary insurer pay it the unearned premium reserve within 60 days of treaty inception, whereas the terminated reinsurer refuses to return the unearned premium to the primary insurer within the 60-day period. Which one of the following clauses may require the primary insurer to pay the incoming reinsurer the unearned premium within the 60 days even though it has not received payment from the outgoing reinsurer? a. Portfolio Transfer Clause. b. Reinsurance premium clause. c. Commencement and termination clause. d. Reinsuring Clause.

a. Portfolio Transfer Clause.

1.) Per risk excess of loss reinsurance covers a. Property insurance and applies separately to each loss occurring to each risk. b. Workers compensation insurance and applies to the total of all losses occurring from one risk. c. Property insurance and applies to the total of all losses occurring from one risk. d. Liability insurance and applies to each loss occurring from each occurrence.

a. Property insurance and applies separately to each loss occurring to each risk.

14. Which one of the following clauses limits the amount of the liability that the primary insurer can transfer to the reinsurer and establishes the primary insurer's minimum net retention? a. Retention and limits b. Reports and remittances c. Liability of the reinsurer d. Net Retention

a. Retention and limits

3. Which one of the following bases of attachment covers policies issued or renewed by the primary insurer on or after the reinsurance treaty's effective date? a. Risks Attaching b. Losses Occuring c. Policies issued d. In-force policies

a. Risks Attaching

5. A property line guide for a risk being placed into a surplus share treaty a. Suggests a net retention. b. Establishes a reinsurance cost. c. Estimates profitability. d. Sets a reinsurance commission.

a. Suggests a net retention.

2. A potential advantage of a broker marketing system for reinsurance over the direct writing system is a. The broker's bargaining leverage can capture better terms and conditions. b. Less chance of reinsurer solvency. c. Reinsurance transactions are completed more quickly. d. Efficiency in the negotiation of terms and the handling or reinsurance premiums.

a. The broker's bargaining leverage can capture better terms and conditions.

7. Reinsurer (Re) provides a casualty excess of loss treaty and has recently approached Primary Insurer (PI) with an offer to close out all open liability claims under the treaty for one lump sum of money even though the claims have not fully developed. Under what clause in the treaty would Re be relying in this attempt at this settlement with PI? a. The commutation clause. b. The sunset clause. c. The sunrise clause. d. The reinstatement clause.

a. The commutation clause.

4. Which one of the following is the main determining factor for the limit of an aggregate excess of loss treaty? a. The cost of the reinsurance premium to the primary insurer. b. The level of the primary insurer's surplus account. c. The overall financial condition of the primary insurer. d. The results of the catastrophe model that has been used.

a. The cost of the reinsurance premium to the primary insurer.

3. All of the following are true regarding the normal term of a typical commencement and termination clause in a reinsurance treaty, EXCEPT: a. The effective time for commencement of coverage is usually 12:01 PM standard time. b. Under clash cover and catastrophe treaties, standard time pertains to the time zone at the location of the insurer's home office. c. Under pro rata or excess of loss property treaties, standard time pertains to the time zone at the location of the insured property. d. Under casualty excess of loss treaties, standard time pertains to the time zone at the mailing address of the named insured.

a. The effective time for commencement of coverage is usually 12:01 PM standard time.

2. Reinsurers have a direct interest in the reserve adequacy of the primary insurer. Which one of the following best describes how reinsurance written on a pro rata basis is affected by a primary insurer under-reserving? a. The understatement affects the pro rata reinsurer to the same degree. b. The reinsurer may not be aware of substantial outstanding losses. c. Insolvency of a primary insurer will make the reinsurer responsible. d. Reinsurance premiums charged for pro rata reinsurance may be inadequate.

a. The understatement affects the pro rata reinsurer to the same degree.

1. Which one of the following statements concerning the effect of under reserving on premium rates is true? a. Under-reserving makes incurred losses appear too low and results in rates that are too low. b. Insurers make up for under-reserving by decreasing rates. c. Future rates are not affected by under-reserving; only loss payments matter in ratemaking. d. D. Under-reserving makes surplus appear too small and results in future rates that are too high.

a. Under-reserving makes incurred losses appear too low and results in rates that are too low.

6. CDE Insurance purchases a 60% quota share treaty for which subject written premiums are $25,000,000 and subject earned premiums are $20,000,000. The provisional ceding commission is 30%. What is the surplus relief effect of the quota share treaty? a. 360,000 b. 900,000 c. 6,000,000 d. 7,500,000

b. 900,000

13. Which one of the following tools is used to aid primary insurers and reinsurers in determining the financial effects of a surplus share treaty with the retention set at various levels? a. A construction classification grid. b. A limits profile. c. An occupancy profile. d. A line guide.

b. A limits profile.

4. A reinsurance underwriter must consider various factors that modify the reinsurance rate when exposure rating is used to price casualty excess of loss treaties. Which one of the following is one of these factors? a. Exposure to loss. b. Allocated loss adjustment expense. c. Trend factor. d. Age-to-age factor.

b. Allocated loss adjustment expense.

6. Collateral requirements can be adjusted for unauthorized reinsurers that meet certain qualifications and are approved by the state insurance regulator of the ceding company's state of domicile. Those reinsurers are classified as a. Excluded Reinsurers b. Certified Reinsurers c. Collateralized Reinsurers d. Authorized Reinsurers

b. Certified Reinsurers

10.) Excess of policy limit losses are extra-contractual obligations of the insurer. However, a feature that distinguishes excess of policy limits losses from other types of extra-contractual obligations is that they a. Result from bad faith in claim handling b. Could have been settled within the insured's policy limits c. Are paid under a clash cover d. Result from a suit by the insured

b. Could have been settled within the insured's policy limits

4. When conducting a reinsurance audit, a decision must be made as to the scope of the audit and what will be included. Making this decision is referred to as a. Determining the approach. b. Establishing the objective. c. Evaluating insurer practices. d. Gathering information.

b. Establishing the objective.

4. All of the following are reasons for immediate termination often included in sudden death provisions, EXCEPT a. Insolvency of the primary insurer. b. Excessive Losses. c. Reduction in the primary insurer's paid in capital. d. Reduction of the primary insurer's net retention.

b. Excessive Losses.

5. As part of a reinsurance claim audit, interviews should be conducted with the primary insurer. Which one of the following would most likely be asked by the auditor? a. Can all paid losses be traced to the loss bordereaux? b. Have there been changes to the reserving practices? c. Are premiums sent to the reinsurer on a timely basis? d. Do you require inspections of high hazard loss exposures?

b. Have there been changes to the reserving practices?

1. Which one of the following would be true regarding the functions of a surplus share treaty? a. It is generally chosen by a primary insurer selling a new insurance product. b. It is often used for large, complex property loss exposures. c. It will typically provide the primary insurer with needed catastrophe protection. d. It is replaced by quota share reinsurance once credible loss experience is obtained.

b. It is often used for large, complex property loss exposures.

1. Property per risk excess of loss reinsurance may be preferred over surplus share reinsurance because a. It stabilizes loss experience. b. It requires less administrative work. c. It provides catastrophe protection. d. It allows the attachment point to vary.

b. It requires less administrative work.

3. Which one of the following statements regarding property catastrophes and the function of property catastrophe reinsurance treaties is true? a. Using catastrophe reinsurance tends to cause peaks in primary insurers' loss ratios. b. Large catastrophes have a widespread effect on the property-casualty industry because they reduce policyholders' surplus. c. With catastrophe reinsurance, losses in excess of the retention are retained by the primary insurer. d. Having catastrophe reinsurance treaties guarantees that primary insurers will have constant loss ratios.

b. Large catastrophes have a widespread effect on the property-casualty industry because they reduce policyholders' surplus.

1. In a catastrophe reinsurance treaty the defining wording "As regards to windstorm, hail, ..., all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event" is part of which one of the following clauses? a. Retention and limits clause. b. Loss occurrence clause. c. Ultimate net loss clause. d. Term clause.

b. Loss occurrence clause.

2. Which one of the following bases of attachment covers the unearned portion of policies in force as well as policies issued or renewed by the primary insurer on or after the reinsurance treaty's effective date? a. Risk Attaching b. Losses occurring c. Policies issued d. In-force policies

b. Losses occurring

2. When a reinsurance auditor is reconciling the information on the compiled reports with the data that was used for input purposes, the auditor is evaluating a. Audit objectives. b. Output controls. c. Transactional controls. d. Input controls.

b. Output controls.

5. Certified reinsurers are required to post collateral, which is recorded in Schedule F—Part 6 of the National Association of Insurance Commissioners (NAIC) Annual Statement. Which one of the following is true regarding items included in Part 6 of Schedule F? a. If recoverables from certified reinsurers are fully secured, no provision for overdue reinsurance must be made for past due balances over 90 days. b. Part 6 provides a provision for the calculation of reinsurer collateral deficiencies. c. Certified reinsurers are not classified as "slow paying" in Part 6 until payments are more than one year past due. d. Collateral deficiencies from Part 6 are reported on the asset side of the balance sheet.

b. Part 6 provides a provision for the calculation of reinsurer collateral deficiencies.

3. Which one of the following should the reinsurer apply to the loss cost rate in order to determine the final reinsurance rate for a property per risk excess of loss treaty? a. Experience Rate. b. Profit and contingencies. c. Exposure rate. d. Subject Premium.

b. Profit and contingencies.

2.) Under a per policy excess of loss treaty, the attachment point and the reinsurance limit apply a. Separately to each loss under each policy up to an aggregate limit specified in the treaty. b. Separately to each insurance policy regardless of the number of losses occurring under each policy. c. Separately to each category of loss under each policy as specified in the treaty. d. To the aggregate of all losses of a specific type from a primary insurer's book of business.

b. Separately to each insurance policy regardless of the number of losses occurring under each policy.

15. Primary insurers use line guides as underwriting tools to a. Price the amount of reinsurance needed. b. Specify the maximum amount of insurance. c. Establish the method of cession. d. Determine written premium by major class.

b. Specify the maximum amount of insurance.

3. Primary insurers use line guides as underwriting tools to a. Price the amount of reinsurance needed. b. Specify the maximum amounts of insurance. c. Establish the method of cession. d. Determine written premium by major class.

b. Specify the maximum amounts of insurance.

3. To monitor insurer solvency, state insurance regulators employ a variety of financial regulatory tools that the National Association of Insurance Commissioners (NAIC) has developed. Which one of the following such tools was established to develop and maintain standards to promote sound insurance company financial solvency regulation? a. Off-site monitoring and analysis. b. The NAIC Accreditation program. c. The NAIC risk-based capital (RBC) system. d. On-site, risk focused examinations.

b. The NAIC Accreditation program.

1. All of the following are true regarding the excess of policy limits clause, EXCEPT: a. The clause requires the reinsurer to indemnify the primary insurer for losses in excess of policy limits. b. The clause requires the primary insurer to settle all losses on reinsured policies within the limits of the policies. c. The clause is usually used in treaties covering liability loss exposure. d. The clause generally requires that the original loss and the loss in excess of policy limits constitutes one loss.

b. The clause requires the primary insurer to settle all losses on reinsured policies within the limits of the policies.

6. Catastrophe options, an alternative to traditional catastrophe reinsurance, are attractive to capital market investors for which one of the following reasons? a. They offer superior interest rates. b. They can be used to help diversify an investment portfolio. c. They do not require cash payment when triggered. d. They do not involve risk transfer.

b. They can be used to help diversify an investment portfolio.

11.) Which one of the following is true regarding sidecar arrangements as an alternative to traditional and non-traditional reinsurance? a. Under a sidecar arrangement, investors receive their return for the risk assumed through period interest payments on the principle amount assumed. b. Under these arrangements, the primary insurer charges a ceding commission and may receive a profit commission if the book of business is profitable. c. Sidecars are a means through which a primary insurer can exchange a portion of its insurance risk for another insurer's insurance risk d. Sidecars have a strike price at which the primary insurer will be able to receive cash from its investors to enable it to pay losses from a catastrophe.

b. Under these arrangements, the primary insurer charges a ceding commission and may receive a profit commission if the book of business is profitable.

8. Mutual Insurer has a $200,000 xs $100,000 treaty with Reinsurer. Mutual is insolvent, and the liquidator settled a $450,000 case for $400,000. What is the amount recoverable from Reinsurer if the reinsurance treaty contains an insolvency clause? a. 50,000 b. 100,000 c. 200,000 d. 400,000

c. 200,000

7.) Brook Insurance has a 5-line surplus share treaty with Cedars Reinsurance. The line is $100,000. Brook Insurance has the following policies: Limit Premium Loss Policy A $50,000 $1,000 $1,000 Policy B $400,000 $4,000 $50,000 Policy C $800,000 $16,000 $100,000 How much of the premium for Policy B will Brook Insurance cede to Cedars Reinsurance? a. 800 b. 1,000 c. 3,000 d. 3,200

c. 3,000

9.) A primary insurer has a five-line surplus share treaty with a $50 million limit. For a specific loss exposure with coverage limit needs of $20 million, the primary insurer's line guide permits a $5 million line. Which one of the following percentages will be used to cede premiums and losses to the reinsurer? a. 20% b. 25% c. 75% d. 80%

c. 75%

6. Data is continuously reported to the reinsurer by the primary insurer. A reinsurance audit that examines premium, loss, and commission data would be a. An underwriting audit. b. A treaty audit. c. A transactional audit. d. A bordereaux audit.

c. A transactional audit.

8.) A working Cover is: a. A quota share treaty with a high percent of ceding b. A pro rata treaty with a variable attachment point. c. An excess of loss reinsurance agreement with a low attachment point. d. A surplus share facultative reinsurance contract with a small line

c. An excess of loss reinsurance agreement with a low attachment point.

6. On Schedule F—Part 3 of the National Association of Insurance Commissioners (NAIC) Annual Statement, which one of the following is subtracted from the total recoverables due to the primary insurer to determine the net amount recoverable from reinsurers? a. Known Case loss reserves recoverable. b. IBNR losses recoverable. c. Ceded balances payable to reinsurers. d. Reinsurance premiums ceded.

c. Ceded balances payable to reinsurers.

2. A primary insurer negotiates a reinsurance treaty that can be canceled by either party with 90 days notice at the end of each quarter. This is an example of a a. Term Contract. b. Run off basis. c. Continuous contract. d. Cut-off basis.

c. Continuous contract.

11. Which one is true regarding the use of limits in quota share reinsurance? a. The maximum limit allowed usually has no effect on the amount of the ceding commission the reinsurer will pay. b. If the reinsurance treaty covers two or more types of insurance, the maximum limit will be the same for each type. c. Including a per occurrence limit usually results in a higher ceding commission than if no such limit is included. d. Limiting the amount of insurance the primary insurer can cede generally results in a higher ceding commission percentage.

c. Including a per occurrence limit usually results in a higher ceding commission than if no such limit is included.

9. The nature of cession in the reinsuring clause in a surplus share treaty states that a. The reinsurer is able to accept or reject individual risks ceded under the treaty. b. Net retention is the portion of the risk retained by the reinsurer. c. Indemnification is subject to the limits set forth in the retention and limits clause. d. "Surplus Liability" is a fixed portion of the Company's gross liability.

c. Indemnification is subject to the limits set forth in the retention and limits clause.

1. One function of a casualty excess of loss treaty is to stabilize loss experience. Which one of the following best identifies how this function aids a primary insurer? a. It establishes a claims-made trigger b. It protects the insurer from multiple losses. c. It aids financial planning and supports growth. d. It provides catastrophe protection.

c. It aids financial planning and supports growth.

11. Which one of the following statements about excess of loss reinsurance reserving techniques is most accurate? a. The reserving problems of excess of loss reinsurers do not differ significantly from those of primary insurers. b. Because excess of loss reinsurance treaty terms tend to be standardized, predicting loss development patterns is simplified. c. It is difficult for excess of loss reinsurers to select loss development factors when using the loss triangle method of reserve estimation. d. Excess of loss reinsurance reserves tend to arise from a relatively homogeneous set of primary insured losses.

c. It is difficult for excess of loss reinsurers to select loss development factors when using the loss triangle method of reserve estimation.

2. Catastrophe reinsurance treaties may include wording that limits losses arising from a single catastrophic event to those losses that occur within a specified time period. That wording would appear in which one of the following treaty clauses? a. Retention and Limits. b. Reinstatement. c. Loss Occurrence. d. Ultimate net loss.

c. Loss Occurrence.

8. Three definitions are key to a surplus share treaty. They are the definitions of surplus liability, risk, and a. Limits. b. Cession. c. Net Retention. d. Loss Occurrence.

c. Net Retention.

11. Primary insurers entering into surplus share treaties are sometimes not permitted to use underlying reinsurance. When this restrictive wording is included as a separate clause, it is referred to as the a. Method of cession clause. b. Liability of the reinsurer clause. c. Net retention clause d. Surplus Liability Clause

c. Net retention clause

4. Part 3 of the Underwriting and Investment Exhibit of the National Association of Insurance Commissioners (NAIC) Annual Statement includes the allocation of expenses as supporting documentation to the Statement of Income. Which one of the following statements is true regarding this Part 3 supporting documentation? a. Expenses from reinsurance ceded are added into the net expenses included in this section. b. Expenses are analyzed and reported by line of business in this section. c. Part 3 allocates expenses by three major functional areas. d. IBNR is one of the expenses that is part of the Part 3 allocation.

c. Part 3 allocates expenses by three major functional areas.

2. Which one of the following is a result of nonadmitted assets on an insurer's Annual Statement balance sheet? a. Total Liabilities are inflated. b. Liquidity requirements are reduced. c. Policyholders' surplus is reduced. d. Overall asset value is increased.

c. Policyholders' surplus is reduced.

4. Which one of the following best describes why a property per risk excess of loss treaty would not be adequate for catastrophe protection? a. The limits provided would generally not be adequate for a catastrophe. b. Per risk excess of loss treaties normally exclude losses stemming from catastrophes. c. Reinsurance protection would not be triggered for many multiple smaller losses. d. The treaty would not respond for very large individual losses within the catastrophe.

c. Reinsurance protection would not be triggered for many multiple smaller losses.

8. Which one of the following statements is true regarding an insurer's total case reserves? a. Total case reserves for reported losses tend to decrease over time. b. The simplest way to correct case reserves is to review each open claim file and adjust reserves as needed. c. Reinsurers may supplement the primary insurer's case reserves for their own financial reporting purposes. d. It would be inappropriate for an insurer to increase case reserves on each claim by the same percentage.

c. Reinsurers may supplement the primary insurer's case reserves for their own financial reporting purposes.

2. Which one of the following is a significant difference between an aggregate excess of loss treaty that applies on a losses occurring basis and one that applies on a losses incurred basis? a. The co-participation provisions. b. The treatment of reinstatements. c. The coverage of reserve changes. d. The setting of the internal and outside retentions.

c. The coverage of reserve changes.

4. Which one of the following clauses included in property catastrophe reinsurance treaties includes the per loss occurrence limit, the co-participation provision and the net retention stated as the ultimate net loss per loss occurrence? a. The reinstatement clause. b. The ultimate net loss clause. c. The retention and limits clause. d. The other reinsurance clause

c. The retention and limits clause.

6. Which one of the following establishes a cession priority when several layers of surplus treaty are used? a. The net retention clause. b. The retention and limits clause. c. The surplus liability clause. d. The method of cession clause.

c. The surplus liability clause.

9. The Bornhuetter-Ferguson method of estimating loss reserves a. Relies on judgmental weights. b. Uses an objective approach to select incurred but not reported (IBNR) factors. c. Uses expected losses and an incurred but not reported (IBNR) factor. d. Combines the case reserve and loss triangle methods.

c. Uses expected losses and an incurred but not reported (IBNR) factor.

2. Which one of the following best describes a modification needed to the definition clause in a casualty excess of loss treaty for a workers compensation occupational disease exposure? a. Whether the accumulation of all injuries that occur during the policy term are considered one occurrence. b. Whether all losses proceeding from or traceable to the same causation during the policy term will be considered one occurrence. c. Whether the loss for each affected person from the same occupational exposure will be considered one occurrence. d. Whether all claims made against the insured company during the extended reporting period will be considered one occurrence.

c. Whether the loss for each affected person from the same occupational exposure will be considered one occurrence.

5. A reinsurer writes a $4,000,000 xs $1,000,000 reinsurance treaty with an insolvency clause. The primary insurer became insolvent, and the liquidator paid $2,000,000 of a $4,000,000 loss that is covered by the reinsurance treaty. What amount of the loss is the reinsurer obligated to pay? a. 0 b. 1,000,000 c. 2,000,000 d. 3,000,000

d. 3,000,000

5.) Westfork Mutual is a personal lines insurer. Based on its financial condition and regulatory requirements, Westfork Mutual has determined that the maximum amount of property insurance it can retain on homeowner's policies is $200,000. The primary insurer would like to be able to participate in the marketplace of homes up to $1 million in value. Westfork Mutual decides to enter a surplus share treaty agreement with First Class Reinsurance. Which one of the following describes the appropriate reinsurance agreement? a. An 80% surplus share treaty with a 200,000 line b. A five-line surplus share treaty with a 1,000,000 line c. An 80% surplus share treaty with a 1,000,000 line d. A four-line surplus share treaty with a 200,000 line

d. A four-line surplus share treaty with a 200,000 line

3. Reinsurance audits are typically conducted by which one of the following entities? a. Financial rating agencies. b. State insurance regulators. c. An independent third party. d. A party to the reinsurance transaction.

d. A party to the reinsurance transaction.

4. One of the items that should always be included in a treaty reinsurance proposal is a limits profile. A limits profile a. Establishes the attachment point and the reinsurance limits for the treaty. b. Lists the policy coverage period, including the exact time that the policy becomes effective. c. Indicates the primary insurer's retention on each class of loss exposure ceded under the treaty. d. Categorizes the primary insurer's policies into ranges to help the reinsurer understand the loss exposures subject to the treaty.

d. Categorizes the primary insurer's policies into ranges to help the reinsurer understand the loss exposures subject to the treaty.

5. The purpose of the self-insured obligations clause is to a. Cover the self-insured exposures of the primary insurer's customers. b. Specify the exposures that must be self-insured by the primary insurer. c. Provide excess of loss reinsurance above a self-insurance program. d. Cover the policies issued by the primary insurer for its own loss exposures.

d. Cover the policies issued by the primary insurer for its own loss exposures.

7. The liability of the reinsurer clause in a surplus share reinsurance treaty a. Describes the insurance policies to be covered under the treaty. b. Establishes coverage on a losses occurring basis. c. Defines what constitutes a risk under the treaty. d. Establishes the basis of the cession to the reinsurer.

d. Establishes the basis of the cession to the reinsurer.

12. The surplus liability clause in a surplus share reinsurance treaty a. Identifies the policies to which the surplus share treaty applies. b. Requires the primary insurer to record the net retention and cession amount for each loss exposure c. Restricts the primary insurer's ability to adjust percentages ceded for coverage sublimits. d. Establishes the cession priority when several layers of treaties are used.

d. Establishes the cession priority when several layers of treaties are used.

3.) Which one of the following statements is correct regarding finite risk reinsurance? a. Finite risk reinsurance is less expensive than most traditional types of reinsurance. b. Finite risk reinsurance is designed to cover high frequency and low severity loss exposures. c. Finite risk reinsurance agreements generally allow the reinsurer to assess additional premium if losses exceed premium. d. Finite Risk reinsurance agreements typically have a three to five year term.

d. Finite Risk reinsurance agreements typically have a three to five year term.

6.) Surplus share reinsurance a. Is designed to split losses according to a set percentage b. Requires primary insurers to share loss exposures that they could safely retain c. Covers policies with amounts of insurance less than the line d. Is typically used only with property insurance

d. Is typically used only with property insurance

13.) Excess of loss reinsurance a. Typically involves ceding commissions for primary insurers. b. Is priced in proportion to the amount of insurance. c. Responds when the amount of insurance per risk exceeds the treaty limit. d. Is used with property or liability loss exposure.

d. Is used with property or liability loss exposure.

1. The federal excise tax clause a. Excludes federal excise tax on retroceded premium. b. Establishes the amount of tax due. c. Exempts certain alien reinsurers from paying federal excise tax. d. Makes the primary insurer responsible for remitting the tax.

d. Makes the primary insurer responsible for remitting the tax.

7. All of the following are reasons for immediate termination often included in sudden death provisions, EXCEPT: a. Change in the primary insurer's ownership. b. Reduction of the primary insurer's net retention. c. Reduction in the primary insurer's policyholders' surplus. d. Nonpayment of balances.

d. Nonpayment of balances.

7. Which one of the following statements about the arbitration clause in a reinsurance contract is most accurate? a. The arbitration clause requires that the arbitration panel consist of judges who have a background in international insurance law. b. The arbitrators in a reinsurance arbitration are bound by the strict rules of procedure and evidence. c. The arbitration clause does not apply to denials of coverage under the treaty. d. One of the goals of the arbitration clause is to resolve disputes quickly.

d. One of the goals of the arbitration clause is to resolve disputes quickly.

10. Which one of the following best explains why a reinsurer has difficulty reserving excess of loss reinsurance claims? a. The reinsurer generally expects that all losses will settle within the retention. b. IBNR reserves are usually not established. c. Reinsurers are unable to review primary insurer files to verify that reserves are appropriate. d. Primary insurer reserves may develop much more than originally anticipated.

d. Primary insurer reserves may develop much more than originally anticipated.

1. A primary insurer may have other reinsurance that covers loss exposures that are covered under a catastrophe treaty. This other reinsurance is known as inuring reinsurance when it a. Increases the net retention of the primary insurer. b. Increases the cost of the catastrophe treaty. c. Eliminates the co-participation requirement. d. Reduces the loss to the catastrophe treaty.

d. Reduces the loss to the catastrophe treaty.

6. Under a property per risk excess of loss treaty the retention and limits clause specifies a. That the primary insurer will only suffer the retention once for any one occurrence. b. The number of reinstatements allowed. c. The ultimate net loss that will be paid by the primary insurer when a loss occurs. d. That the retention and limit will apply to any one risk for each loss occurrence.

d. That the retention and limit will apply to any one risk for each loss occurrence.

4. A sliding scale ceding commission is calculated by adjusting the ceding commission percentage based on a. The projected reinsurer expenses under the treaty. b. The projected loss ratio under the treaty. c. The actual reinsurer expenses under the treaty. d. The actual loss ratio under the treaty.

d. The actual loss ratio under the treaty.

8. Schedule P—Part 4 of the National Association of Insurance Commissioners (NAIC) Annual Statement includes a history of bulk and incurred but not reported (IBNR) reserves. Which one of the following statements is true regarding the information shown in this schedule? a. Newly reported claims that have no specific case reserves are not included in the data. b. Reopened claims are intentionally not included in this information so as not to distort it. c. Defense and cost containment expenses are not included in the information provided. d. The data shown forms a loss development triangle.

d. The data shown forms a loss development triangle.

3. Which one of the following statements is true regarding the underwriting information normally included in a treaty reinsurance proposal? a. For property insurance, five or more years of loss history is usually required because property claims take long to settle and are generally not reported immediately. b. For liability insurance, only paid losses should be included in the loss history provided because the ultimate value of these claims is uncertain. c. Softer pieces of information such as risk tolerance and pricing philosophies of the primary insurer are generally not included in the reinsurance proposal. d. The loss information included in the reinsurance proposal should indicate whether the amounts shown are ground-up losses or net of reinsurance recoveries.

d. The loss information included in the reinsurance proposal should indicate whether the amounts shown are ground-up losses or net of reinsurance recoveries.

7. A history of cumulative net paid losses is provided in Schedule P—Part 3 of the NAIC Annual Statement. In addition, Part 3 of this Schedule also contains a. Reinsurance amount applied. b. Premium by type of insurance. c. The impact on policyholder surplus. d. The number of claims closed.

d. The number of claims closed.

8. All of the following are true regarding the original conditions clause, EXCEPT: a. The original conditions clause states the reinsurer's share of the underlying premium, net of ceding commission, will not be reduced by dividends (if any) paid by the primary insurer to the underlying insured. b. The original conditions clause establishes that the liability assumed by the reinsurer under the reinsurance treaty is on the same basis as the underlying coverage provided by the primary insurer. c. The original conditions clause addresses dividends specifically because many primary insurers have dividend plans that enable the policyholder to share in profits which potentially diminish the amount of subject premium. d. The original conditions clause specifies that additional reinsurance, facultative or treaty, applies before the application of this reinsurance agreement.

d. The original conditions clause specifies that additional reinsurance, facultative or treaty, applies before the application of this reinsurance agreement.

6. A sudden death provision might be triggered by all of the following except: a. The primary insurer's management changes. b. The primary insurer reduced its net retention. c. The primary insurer reduces its paid in capital. d. The primary insurer increases its loss exposure.

d. The primary insurer increases its loss exposure.

16. The amount of ceding commission that a reinsurer is willing to pay is based on which one of the following? a. The limit profiles. b. The line guides. c. The large line capacity. d. The treaty's limits.

d. The treaty's limits.

4. The amount of ceding commission that a reinsurer is willing to pay is based on which one of the following? a. The limit profiles. b. The line guides. c. The large line capacity. d. The treaty's limits.

d. The treaty's limits.

8. Reinsurance Company (ReC) has decided to complete an underwriting audit on Primary Insurance Company (PIC). Which one of the following would be a primary objective of such an audit? a. To be sure that PIC is paying and reserving claims appropriately. b. To verify that PIC is correctly reporting premium and loss data. c. To be sure that the underwriting files are properly documented. d. To verify that PIC is ceding the correct policies to the treaty

d. To verify that PIC is ceding the correct policies to the treaty

1. A reinsurer requires that the primary insurer add a pollution endorsement to every policy covered by a quota share treaty. This requirement is usually contained in a a. Special acceptance clause. b. Original Conditions Clause. c. Pollution exclusion clause. d. Warranties Clause.

d. Warranties Clause.