RMIN 4310 - Chapter 8 Reinsurance

Brook Insurance has a 5-line surplus share treaty with Cedars Reinsurance. The line is $100,000. Brook Insurance has the following policies:

$0

IIA Insurance has a 95% of $20 million xs $1 million catastrophe excess of loss reinsurance treaty with Mega Reinsurer. Assuming IIA sustains a $15 million catastrophe loss subject to the treaty, how much will IIA retain?

$1,700,000

ABC Insurance Company has a 20% quota share treaty with XYZ Reinsurer. One of ABC's policies has a $1 million limit, a premium of $8,000, and a loss of $50,000. How much of the loss will XYZ Reinsurer pay?

$10,000

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

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?

$2,800,000

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 2?

$200,000

Brook Insurance has a 5-line surplus share treaty with Cedars Reinsurance. The line is $100,000. Brook Insurance has the following policies: (policy B)

$3,000

Boca Insurance Company enters a quota share reinsurance treaty with Beetle Reinsurance Company (Beetle Re). Boca retains 60% of each loss exposure subject to the treaty while reinsuring the remaining amount to Beetle Re. Assuming a $100,000 loss occurs that is subject to this reinsurance agreement, Beetle Re's portion of the loss is

$40,000

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:

$450,000

ABC Insurance Company (ABC) has entered into a 60% quota share treaty with XYZ Reinsurance Company (XYZ). An $80,000 loss occurs that is subject to the reinsurance treaty. Under the terms of the treaty, how much would XYZ indemnify ABC for the loss?

$48,000

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?

$500,000

ABC Insurance Company (ABC) has entered into a 60 percent quota share treaty with XYZ Reinsurance Company (XYZ). An $80,000 loss occurs that is subject to the reinsurance treaty. Under the terms of the treaty, how much would XYZ indemnify ABC for the loss?

$80,000 x 60% = $48,000

Violet Insurance Company has a surplus share treaty with White Reinsurer and retains a line of $50,000. The treaty contains five lines and provides for a maximum cession of $250,000. Violet Insurance issues a policy insuring a building for $150,000 for a premium of $1,900 with one loss of $60,000. What percentage of insurance, premiums, and losses is ceded to White Reinsurer?

66.67 % (100,000 (2 lines ceded) ÷ 150,000 = 66.67%; The percentage of insurance, premiums and losses ceded to White Reinsurer is 66.67%. (Or, 2 ceded lines ÷ 3 insured lines = 66.67%.))

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?

75%

Which one of the following statements is correct regarding treaty reinsurance?

A long-term relationship with a reinsurer usually enables primary insurers to consistently fulfill producers' requests to place insurance with them.

Which one of the following best defines the term "direct writing reinsurer"?

A reinsurer whose employees deal directly with primary insurers

Which one of the following statements regarding treaty reinsurance and facultative reinsurance is true?

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

Reinsurance is best described as

An agreement by a reinsurer to indemnify a primary insurer for losses.

A working cover is

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

Which one of the following correctly describes a capital market instrument used by insurers to finance risk?

An industry loss warranty is an insurance-linked security that covers the primary insurer in the event that the industry-wide loss from a particular catastrophe exceeds a predetermined threshold.

Which one of the following correctly describes a capital market instruments used by insurers to finance risk?

An industry loss warranty is an insurance-linked security that covers the primary insurer in the event that the industry-wide loss from a particular catastrophe exceeds a predetermined threshold.

A facultative reinsurance agreement is written for a specified time period

And cannot be cancelled by either party unless contractual obligations, such as payment of premiums, are not met.

Clash coverage limits should be set by considering all of the following, EXCEPT:

Catastrophe excess of loss reinsurance purchased by the primary insurer

Jones Insurer writes only commercial property policies for businesses in Florida. Jones has a large premium base and excellent overall experience. Jones would have all of the following, EXCEPT:

Clash exposure

Which one of the following would be most likely to be a factor affecting the selection of a retention by a primary insurer in its reinsurance program?

Co-participation provision

Which one of the following statements is correct regarding finite risk reinsurance?

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

Which one of the following statements is correct regarding insurance regulatory constraints on growth?

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.

Reinsurance pools, syndicates, and associations are

Groups of insurers that share the loss exposures of the group, usually through reinsurance.

Which one of the following statements is correct regarding treaty reinsurance?

If treaty reinsurance agreements permitted primary insurers to choose which loss exposures they ceded, the reinsurer would be exposed to adverse selection.

Professional reinsurers

Interact with other insurers either directly or through intermediaries.

Facultative reinsurance

Involves more administrative expense than treaty reinsurance transactions.

Which one of the following describes the purpose of the intermediary clause that some states require to be included in reinsurance agreements?

It indicates that the primary insurer's bankruptcy does not affect the reinsurer's liability for losses under the agreement.

Which one of the following describes the purpose of the intermediary clause that some states require to be included in reinsurance agreements?

It states that the reinsurance intermediary is the reinsurer's agent for collecting reinsurance premiums and paying reinsurance claims.

Which one of the following statements is correct regarding the use of treaty and facultative reinsurance?

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

Treaty reinsurance

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

Which one of the following statements is true regarding the concept of contract certainty?

Part of the NAIC's rules require that reinsurance contracts be finalized within nine months of the policy commencement.

Which one of the following types of excess of loss reinsurance is used primarily with liability insurance; applies the attachment point and the reinsurance limit separately to the losses occurring on each insurance policy; and is triggered when a loss on a policy exceeds the attachment point?

Per policy

Per risk excess of loss reinsurance covers

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

Best Reinsurers assumes, under a treaty, all homeowners and personal auto business underwritten by Aurora Insurance Company. On occasion, Aurora will underwrite some homeowners policies with very high value homes. Aurora underwriters have been directed through their underwriting guidelines not to cede high value homes (as in the directive) to the treaty. Although the treaty does not expressly exclude this business, the directive was developed to protect the treaty from unusually high losses. If an application is submitted for a home that falls within the directive and Aurora does not wish to retain the entire risk, what is the best method of handling this submission?

Purchase facultative reinsurance and write the policy.

The two major types of pro rata reinsurance are

Quota share and surplus share reinsurance.

A primary insurer is able to obtain surplus relief through reinsurance by

Receiving ceding commissions to offset policy acquisition expenses.

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

Reinsurance Pool

Which one of the following statements is correct regarding the available sources of reinsurance?

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

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

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

Which one of the following best describes why a group of insurers would choose to form a reinsurance pool, syndicate, or association?

So that the members can share the loss exposures of the group, usually through reinsurance

Which one of the following is a benefit to primary insurers of being allowed to take credit for reinsurance transactions?

Such credits reduce the drain on the primary insurer's surplus from writing new business.

Treaty reinsurance is best described as a reinsurance agreement

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

All of the following are sources of reinsurance, EXCEPT:

The Brokers & Reinsurance Markets Association (BRMA)

An insurer just began operations in its state of domicile. The minimum surplus requirement is met and the insurer is ready to implement its business plan. It will specialize in workers' compensation coverage because industry data is readily available and loss costs are provided by a rating organization. The investments behind the insurer's surplus are mostly short-term bonds, but it does have a fair amount invested in stocks. Market conditions are favorable for it to write business. With regard to determining reinsurance needs, which one of the following describes the consequences of moving its investments from short-term bonds to common stocks?

The insurer needs more reinsurance because common stock is subject to wide market price fluctuations.

A catastrophe bond is typically issued with a condition that if the issuer suffers a catastrophe loss greater than a specified amount, then

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

Which one of the following statements is correct with regard to reinsurance agreements and their functions?

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

Which one of the following statements is correct with respect to excess of loss reinsurance?

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

Which one of the following statements is correct with respect to pro rata reinsurance?

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

Under a per occurrence excess of loss treaty, the attachment point and the reinsurance limit apply to

The total losses arising from a single event affecting one or more policies.

Which one of the following statements is correct with regard to the use of facultative reinsurance?

The treaty reinsurer is usually willing to allow the primary insurer to remove high-hazard loss exposures from the treaty by using facultative reinsurance.

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?

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

Which one of the following is the primary business purpose of a professional reinsurer?

To serve insurers' reinsurance needs

A key characteristic that distinguishes finite risk reinsurance from other types of reinsurance is that finite risk reinsurance

Transfers a limited amount of risk to the reinsurer.

Which one of the following is true regarding sidecar arrangements as an alternative to traditional and non-traditional reinsurance?

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