CPCU 520 - Chapter 8 - Exploring Reinsurance quiz

Allied Insurer has a $450,000 xs $150,000 per risk excess of loss reinsurance treaty with Omega Reinsurer. An insured with a limit of $1,000,000 sustains the following losses: Loss 1: $125,000 Loss 2: $500,000 Loss 3: $850,000 How much will Omega Reinsurer pay for Loss 1? Select one: A. $0 B. $31,250 C. $56,250 D. $125,000

A. $0

Finite risk reinsurance is considered to be a nontraditional type of reinsurance. Which one of the following factors is expressly acknowledged as an underwriting component under a finite risk agreement? Select one: A. Investment income B. Commission C. Investment expenses D. Bond rating

A. Investment income

Which one of the following statements regarding treaty reinsurance and facultative reinsurance is true? Select one: A. Administrative costs per-risk are higher under a facultative reinsurance arrangement than under a treaty reinsurance arrangement. B. Facultative reinsurance is designed to address the need to reinsure many loss exposures over a period of time. C. Treaty reinsurance arrangements allow the primary insurer to select which risks will be transferred to the reinsurer on a case-by-case basis. D. Primary insurers wishing to reinsure a few loss exposures are more likely to use treaty reinsurance than facultative reinsurance.

A. Administrative costs per-risk are higher under a facultative reinsurance arrangement than under a treaty reinsurance arrangement.

An amusement park ride malfunctioned, injuring four individuals. ABC Insurer, the general liability insurer for the both the amusement park and the ride manufacturer, paid each of the four individuals $500,000 under the amusement park's policy and paid each of the four individuals $250,000 under the ride manufacturer's policy. ABC has a $5 million xs $200,000 per occurrence excess of loss treaty with XYZ Reinsurer. How much would XYZ pay for these losses? Select one: A. $1,400,000 B. $1,500,000 C. $2,800,000 D. $3,000,000

C. $2,800,000 500,000 × 4) + (250,000 × 4) − 200,000 = 2,800,000; XYZ will pay $2,800,000 for these losses.

States Insurer has a $1,200,000 xs $200,000 per policy excess of loss treaty with Coastal Reinsurer. States sustains the following losses: Policy 1: $180,000 Policy 2: $400,000 Policy 3: $1,500,000 How much will States Insurer retain for the loss under Policy 3? Select one: A. $200,000 B. $250,000 C. $300,000 D. $600,000

C. $300,000 States Insurer will retain $300,000 for the loss under Policy 3—Of the total $1,500,000 loss, $1,200,000 is reinsured, leaving $300,000 retained.

Based on the following catastrophe excess of loss treaty information, what is the amount of co-participation that the primary insurer would have to absorb following a $9 million loss? Retention$2,000,000 Co-participation10% for all layers 1st catastrophe layer$5,000,000 xs $2,000,000 2nd catastrophe layer$5,000,000 xs $7,000,000 3rd catastrophe layer$10,000,000 xs $12,000,000 Select one: A. $200,000 B. $270,000 C. $700,000 D. $2,700,000

C. $700,000 9,000,000 - 2,000,000 retention = 7,000,000; 7,000,000 X 10% = 700,000; The amount of co-participation that the primary insurer would have to absorb following a $9 million loss is $700,000. (Or, 10% of $5 million from 1st layer + 10% of $2 million from 2nd layer.)

Treaty reinsurance Select one: A. Obligates the reinsurer to assume those loss exposures that fall within the treaty. B. Requires that a certificate be completed for each transaction. C. Obligates the reinsurer to cede loss exposures covered by the agreement. D. Requires that each loss exposure be separately submitted to the reinsurer.

A. Obligates the reinsurer to assume those loss exposures that fall within the treaty.

Which one of the following statements is correct regarding finite risk reinsurance? Select one: 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 typically have a three to five year term. D. Finite risk reinsurance agreements generally allow the reinsurer to assess additional premium if losses exceed premium.

C. Finite risk reinsurance agreements typically have a three to five year term.

Treaty reinsurance is best described as a reinsurance agreement Select one: A. In which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer must accept all loss exposures submitted. B. That covers an entire class or portfolio of loss exposures, and the reinsurer can typically accept or reject any loss exposures submitted. C. In which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted. D. That covers an entire class or portfolio of loss exposures, and all loss exposures that fall within the treaty are automatically reinsured.

D. That covers an entire class or portfolio of loss exposures, and all loss exposures that fall within the treaty are automatically reinsured.

A catastrophe bond is typically issued with a condition that if the issuer suffers a catastrophe loss greater than a specified amount, then Select one: A. The investors immediately receive a return of their principal. B. The investors must provide additional financial support of the insurer. C. Investors earn relatively high interest rates. D. The obligation to pay interest and/or principal is deferred or forgiven.

D. The obligation to pay interest and/or principal is deferred or forgiven.

One of the functions of reinsurance is to increase large-line capacity. Which one of the following best describes this function from the perspective of a primary insurer? Select one: A. To reduce the financial consequences of a single catastrophic event that causes multiple losses B. To withdraw from a market segment in a geographic area C. To limit liability for a single loss that occurs over more than one policy period D. To assume a loss exposure with potential financial consequences that are higher than its financial condition would otherwise permit

D. To assume a loss exposure with potential financial consequences that are higher than its financial condition would otherwise permit

The two major types of pro rata reinsurance are Select one: A. Per risk excess of loss reinsurance and catastrophe reinsurance. B. Proportional reinsurance and non-proportional reinsurance. C. Quota share and surplus share reinsurance. D. Clash cover and catastrophe reinsurance.

C. Quota share and surplus share reinsurance.

Gemini Insurance Company would like to purchase reinsurance for the professional liability insurance it will sell in the coming year. Which one of the following statements is true concerning the various sources of reinsurance? Select one: A. Reinsurance pools can offer reinsurance to insurers that are not members of the pool. B. Gemini must use a reinsurance broker to place business with a direct writing reinsurer. C. Gemini must pay a ceding commission to a reinsurance broker that places Gemini's business with a reinsurer. D. Primary insurers that offer reinsurance usually run both of these operations from the same unit for administrative ease.

A. Reinsurance pools can offer reinsurance to insurers that are not members of the pool.

When a primary insurer offers reinsurance it usually Select one: A. Separates the reinsurance operations to maintain the confidentiality of insurer information. B. Offers reinsurance only to affiliated insurers. C. Does not purchase reinsurance for its own risks. D. Incorporates the reinsurance function into the existing underwriting function to leverage underwriting skills.

A. Separates the reinsurance operations to maintain the confidentiality of insurer information.

One common feature of quota share reinsurance agreements is that the agreement states Select one: A. A dollar amount of the primary insurer's retention per risk that "disappears" for low-limit risks. B. A maximum dollar limit above which responsibility for additional coverage limits or losses reverts to the primary insurer. C. When the primary insurer's liability for additional coverage limits or losses ends, and all remaining losses revert to the reinsurer. D. The allocation of the high administrative costs to manage the treaty details, which is generally split equally between the primary insurer and the reinsurer.

B. A maximum dollar limit above which responsibility for additional coverage limits or losses reverts to the primary insurer.

A primary insurer is able to obtain surplus relief through reinsurance by Select one: A. Obtaining underwriting advice from a reinsurer to increase underwriting profit. B. Receiving ceding commissions to offset policy acquisition expenses. C. Minimizing fluctuations in retained losses from year to year. D. Reducing large line capacity to minimize the ratio of net written premium to policyholders' surplus.

B. Receiving ceding commissions to offset policy acquisition expenses.

Reinsurance pools can be formed by Select one: A. Regulators when they determine that the reinsurance market is inadequately competitive. B. Reinsurance intermediaries to meet their clients' needs. C. Financial institutions for use as a bank funding mechanism. D. Groups of reinsurers whose retrocession needs have not been adequately met by existing reinsurers.

B. Reinsurance intermediaries to meet their clients' needs.

In a record hard insurance market, four reinsurance intermediaries (brokers) joined forces to offer reinsurance to clients that were having difficulty obtaining reinsurance for several troublesome liability lines. The source of the reinsurance made available to the clients is attributable to a Select one: A. Professional reinsurer. B. Reinsurance pool. C. Guaranty association. D. Reinsurance department of a primary insurer.

B. Reinsurance pool.

Which one of the following statements is correct with regard to reinsurance agreements and their functions? Select one: A. The retention under a reinsurance agreement is always expressed as a percentage of the original amount of insurance. B. The reinsurance agreement identifies the policy, group of policies, or other categories of insurance that are included in the agreement. C. Reinsurers are prohibited from transferring part of the liability they have accepted under reinsurance agreements to other reinsurers. D. The reinsurance agreement alters the terms of the underlying insurance policies.

B. The reinsurance agreement identifies the policy, group of policies, or other categories of insurance that are included in the agreement.

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 PolicyA $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? Select one: A. $800 B. $1,000 C. $3,000 D. $3,200

C. $3,000 100,000 is retained and 300,000 is ceded; 300,000 ÷ 400,000 limit = .75; 4,000 × .75 = 3,000. Brook Insurance will cede $3,000 of the premium for Policy B to Cedars Reinsurance.

Which one of the following statements is correct regarding insurance regulatory constraints on growth? Select one: A. When an insurer's policyholders' surplus increases, that insurer's ability to grow its premium is diminished. B. State insurance regulation mandates that, for accounting purposes, premiums be recognized as revenue at the time a new policy is sold and expenses be recognized as they are earned over the policy's life. C. From a regulator's perspective, if an insurer's ratio of written premium to policyholders' surplus exceeds 3 to 1, the insurer is selling more insurance than is prudent relative to the size of its net worth. D. State regulators prohibit reinsurers from providing primary insurers with payment for policy acquisition.

C. From a regulator's perspective, if an insurer's ratio of written premium to policyholders' surplus exceeds 3 to 1, the insurer is selling more insurance than is prudent relative to the size of its net worth.

Professional reinsurers Select one: A. Do not consider primary insurers' experience or management in forming relationships. B. Are capable of meeting all of the needs of primary insurers through a single reinsurer. C. Interact with other insurers either directly or through intermediaries. D. Provide only treaty reinsurance.

C. Interact with other insurers either directly or through intermediaries.

Which one of the following types of reinsurance is generally chosen by newly incorporated insurers or insurers with limited capital because it is effective in providing surplus relief? Select one: A. Per risk B. Facultative C. Pro rata D. Aggregate excess

C. Pro rata Pro rata reinsurance is generally chosen by newly incorporated insurers or insurers with limited capital because it is effective in providing surplus relief. Its effectiveness results from the practice of paying ceding commissions under pro rata treaties, a practice not common under excess of loss treaties.

Under a per policy excess of loss treaty, the attachment point and the reinsurance limit apply Select one: A. Separately to each loss under each policy up to an aggregate limit specified in the treaty. B. Separately to each category of loss under each policy as specified in the treaty. C. Separately to each insurance policy regardless of the number of losses occurring under each policy. D. To the aggregate of all losses of a specific type from a primary insurer's book of business.

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

Which one of the following statements is correct with respect to excess of loss reinsurance? Select one: A. Reinsurers usually pay ceding commissions under excess of loss agreements. B. Under a working cover type, the attachment point is set at a level where expected claims are retained. C. The reinsurer responds to a loss only when the loss exceeds the primary insurer's retention. D. The excess of loss reinsurer receives a proportional share of the subject premium.

C. The reinsurer responds to a loss only when the loss exceeds the primary insurer's retention.

Which one of the following is a benefit of contingent surplus notes as an alternative to traditional reinsurance? Select one: A. They are linked to industry experience rather than that of the primary insurer. B. The investors assume a portion of the primary insurer's risk. C. They increase a primary insurer's assets without increasing its liabilities. D. The primary insurer may receive both a ceding commission and profit commission.

C. They increase a primary insurer's assets without increasing its liabilities.

One of the functions of reinsurance is to increase large-line capacity. Which one of the following best describes this function from the perspective of a primary insurer? Select one: A. To withdraw from a market segment in a geographic area B. To limit liability for a single loss that occurs over more than one policy period C. To assume a loss exposure with potential financial consequences that are higher than its financial condition would otherwise permit D. To reduce the financial consequences of a single catastrophic event that causes multiple losses

C. To assume a loss exposure with potential financial consequences that are higher than its financial condition would otherwise permit

States Insurer has a $1,200,000 xs $200,000 per policy excess of loss treaty with Coastal Reinsurer. States sustains the following losses: Policy 1: $180,000 Policy 2: $400,000 Policy 3: $1,500,000 How much will States Insurer retain for the loss under Policy 1? Select one: A. $0 B. $90,000 C. $166,667 D. $180,000

D. $180,000 States Insurer will retain $180,000 for the loss under Policy 1 since it is within the $200,000 retention.

Westfork Insurance has a surplus share treaty with Durham Reinsurance and retains a line of $50,000. The treaty contains nine lines. Which one of the following represents that maximum amount of coverage Westfork can write for a single building under the treaty? Select one: A. $50,000 B. $250,000 C. $450,000 D. $500,000

D. $500,000 Westfork's retention is $50,000. The treaty contains nine lines: $50,000 x 9 = $450,000. Westfork's $50,000 + $450,000 = $500,000

Which one of the following are shared by the primary insurer and the reinsurer in pro rata reinsurance transactions? Select one: A. Commissions to producers B. Premium taxes C. Investment income from reserves D. Amounts of insurance

D. Amounts of insurance

Which one of the following is correct with regard to an insurer's line and large-line capacity? Select one: A. The specific characteristics of a loss exposure do not influence an insurer's line. B. Large-line capacity is an insurer's ability to reinsure a larger proportion of its book of business. C. Reinsurance is generally not used to increase insurers' large-line capacity. D. An insurer's line is influenced by the maximum amount of insurance or limit of liability allowed by insurance regulations.

D. An insurer's line is influenced by the maximum amount of insurance or limit of liability allowed by insurance regulations.

Which one of the following statements is correct regarding the use of treaty and facultative reinsurance? Select one: A. Usually, primary insurers have only one reinsurance treaty with a single reinsurer. B. Primary insurers generally use facultative reinsurance as the foundation of their reinsurance program. C. A primary insurer's underwriting policy and underwriting guidelines are usually developed by its treaty reinsurer. D. Most treaties require that all loss exposures within the treaty's terms be reinsured.

D. Most treaties require that all loss exposures within the treaty's terms be reinsured.

Per risk excess of loss reinsurance covers Select one: A. Liability insurance and applies to each loss occurring from each occurrence. 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. Property insurance and applies separately to each loss occurring to each risk.

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

The purpose of ceding commissions in pro rata reinsurance is to Select one: A. Provide funds for a catastrophe fund in case of disaster. B. Compensate the original producer for developing the business. C. Increase the primary insurer's loss reserves for unexpected losses. D. Reimburse the primary insurer for policy acquisition expenses.

D. Reimburse the primary insurer for policy acquisition expenses.

Which one of the following statements is correct regarding the available sources of reinsurance? Select one: A. Reinsurance intermediaries generally have access only to the domestic reinsurance market. B. Reinsurance intermediaries generally represent professional reinsurers and receive a brokerage commission from the primary insurers. C. Primary insurers dealing with direct writing reinsurers generally use a single reinsurer for all of their needs. D. Reinsurance intermediaries can often help secure high coverage limits and catastrophe coverage.

D. Reinsurance intermediaries can often help secure high coverage limits and catastrophe coverage.

Which one of the following statements is correct with respect to pro rata reinsurance? Select one: A. These agreements generally share only loss amounts under covered policies and exclude loss adjustment expenses related to the policies. B. The primary insurer and the reinsurer do not typically use a fixed percentage in sharing the amounts of insurance, premiums, and losses. C. Pro rata reinsurance is available in five forms including per risk, catastrophe, per policy, per occurrence, and aggregate excess. D. The reinsurer usually pays a ceding commission to reimburse the primary insurer for acquisition costs associated with the underlying policies.

D. The reinsurer usually pays a ceding commission to reimburse the primary insurer for acquisition costs associated with the underlying policies.

Which one of the following is the primary business purpose of a professional reinsurer? Select one: A. To offer reinsurance to affiliated insurers B. To create pools so that groups of insurers can share the loss exposures of the group C. To create a syndication of reinsurance intermediaries D. To serve insurers' reinsurance needs

D. To serve insurers' reinsurance needs