ARe 144 Review

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?

Concern as to whether primary insurers can collect reinsurance amounts

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

Warranties clause

contingent surplus note

A surplus note that has been designed so a primary insurer, at its option, can immediately obtain funds by issuing notes at a pre-agreed rate of interest. A benefit of surplus notes is that they increase a primary insurer's assets without increasing its liabilities.

Per risk excess of loss reinsurance covers

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

Primary Insurance Company (PIC) has obtained reinsurance with Unauthorized Reinsurer (URe). For PIC to have this reinsurance qualify for reinsurance accounting, URe must

Provide some form of collateral to PIC.

When the NAIC develops a model law it

Provides a common basis for drafting state laws.

Reinsurer is considering many factors when negotiating the ceding commission it will be willing to pay Primary Insurer. In considering the override, which one of the following factors is Reinsurer particularly considering?

Competition in the reinsurance marketplace

Clash cover limits should be set by considering

the highest limits offered by the primary insurer and the perceived likelihood that multiple policies may be involved in a single occurrence.

Which method is difficult for excess of loss reinsurers to select loss development factors of reserve estimation.

the loss triangle method

a primary insurer uses a line guide as an underwriting tool to specify

the maximum amounts of insurance that it is prepared to sell for various categories of policies

Under pro rata or excess of loss property treaties, standard time pertains to

the time zone at the location of the insured property.

Under clash cover and catastrophe treaties, standard time pertains to

the time zone at the location of the insurer's home office.

Under casualty excess of loss treaties, standard time pertains to

the time zone at the mailing address of the named insured.

The nature of cession in the reinsuring clause in a surplus share treaty states that Indemnification is subject

to the limits set forth in the retention and limits clause.

loss triangle method

used for liability insurance

Percentage method

uses historical relationships between IBNR reserve and reported losses

Age-to-Age Development Factor:

· constructed by dividing each accident year's incurred losses at a point in time by that same accident year's incurred losses at the immediately preceding point in time

what treaty is the most effective for providing surplus relief

QS

Ceded earned premium

QS percentage x subject earned premiums

Ceded written premium

QS percentage x subject written premium

Under which one of the following clauses does the reinsurer assume credit risk for the funds transferred from the primary insurer to the reinsurer through a reinsurance intermediary?

intermediary

Clash cover pricing is based on

judgement and market competition

input controls

seeing if data was put in the system correctly

The tabular method of determining case loss reserves would most likely be used when setting the reserve for

structured settlement amount for a liability insurance claim.

The _______ method is useful for calculating case reserves for lost income benefits under workers compensation insurance or for calculating structured settlement amounts under liability insurance.

tabular

The exposure rating approach to casualty excess of loss reinsurance treaty pricing Considers

the amount of liability inherent in the type of business covered by the treaty being priced.

Big Insurance Company (BIC) has a six-line surplus share reinsurance treaty with Large Reinsurance Company (LRC), with BIC retaining $100,000. BIC has a customer with a policy limit of $500,000 and a premium amount of $2,000. How much of the premium will go to LRC as part of the surplus share reinsurance treaty?

$1,600. Since the policy limit falls within the surplus share treaty amount, BIC would retain the first $100,000 and LRC would cover the next $400,000. Since LRC is covering 80% of the policy limit, then LRC would get 80% of the premium. 80% * $2,000 = $1,600

Reinsurer must determine its costs and minimum profit as part of the process to arrive at a profit-sharing ceding commission. Reinsurer's overhead and brokerage total 5.5%, which is offset with its investment income percentage of 3.5%. Reinsurer also desires a minimum profit of 5%. The estimated quota share premium for this transaction is $2 million. The dollar amount of Reinsurer's costs and minimum profit totals

$140,000 5.5% - 3.5% + 5% = 7%; 7% x $2M = $140,000

Based on the data below, what is the surplus relief effect? Ceded written premiums $50 million Ceded earned premiums $40 million Provisional commission 20%

$2 million

profit margin =

(ceded earned premiums - commissions - expenses - losses) ÷ ceded earned premiums

There are three reasons for the need for additional reinsurance:

1. growth could cause a drain in PHS 2. loss ratio is less stable 3. Growth often entails expanding into markets with greater coverage requirements

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?

3M

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?

600,000

profit-sharing commission

= estimated quota share premium - costs and desired profit - ceding commission - estimated losses and loss adjustment expense

A history and development of incurred net losses and defense and cost containment expenses is found in Schedule P—Part 2 of the NAIC Statement. Which one of the following statements is true regarding the information contained in this schedule? Select one: A. It shows the amount of loss development during the past year and in the past two years. B. A positive number in loss development indicates a decrease in incurred losses. C. No detail is provided by individual line of business written. D. It provides an analysis of earned premiums and losses and loss expense payments.

A

The Bornhuetter-Ferguson method of estimating loss reserves Select one: A. Uses expected losses and an incurred but not reported (IBNR) factor. B. Combines the case reserve and loss triangle methods. C. Uses an objective approach to select incurred but not reported (IBNR) factors. D. Relies on judgmental weights.

A

Which one of the following is true regarding aggregate excess of loss treaties? Select one: A. Aggregate excess of loss treaties can be expensive for primary insurers as they provide the most effective type of reinsurance to stabilize insurers' loss ratios. B. Aggregate excess of loss treaties can protect primary insurers from adverse loss experiences, helping to protect its policyholders' surplus but not its balance sheet position. C. Many primary insurers only use aggregate excess of loss treaties to cover their liability loss exposures from policies such as crop-hail insurance. D. Reinsurance marketplace dislocations help fill the gaps in reinsurance programs which is the main reason small insurers purchase aggregate excess of loss treaties.

A

Which one of the following is true with regard to an aggregate excess of loss treaty with a retention stated as a loss ratio? Select one: A. An occurrence is not defined in the aggregate policy. B. It is most often used for liability insurance coverage. C. It generally contains reinstatement provisions. D. It always has an internal retention but not an outside retention.

A

Which one of the following statements accurately describes the Bornhuetter-Ferguson method to estimate loss reserves? Select one: A. A disadvantage of this method is that incorrect subjective assumptions have far-reaching effects on reserves and net income. B. This method is more easily used for property insurance estimating than for liability insurance. C. This method is used when losses reported to the insurer are not of a sufficiently high financial amount to be otherwise estimated. D. This variation of the two-part combination methods relies heavily on judgmental weights.

A

Which one of the following statements is true regarding a liability policy issued on a claims-made basis? A. The prior acts coverage is important for an insured moving coverage from one insurer to another. B. Retroactive dates serve to add or extend time that coverage will be provided under the policy. C. The extended reporting period can be very lengthy but is never unlimited. D. This approach most often covers types of claims that are settled easily and quickly.

A

When reviewing the written contract between a primary insurer and a managing general agent (MGA), which one of the following would be most concerning for a reinsurance auditor?

A compensation program for the MGA based on premium sold rather than profitability

Primary insurers use line guides as underwriting tools to

Specify the maximum amounts of insurance.

Special purpose vehicle (SPV)

A facility established for the purpose of purchasing income-producing assets from an organization, holding title to them, and then using those assets to collateralize securities that will be sold to investors.

Insurance-linked security

A financial instrument whose value is primarily driven by insurance and/or reinsurance loss events.

Capital market

A financial market in which long-term securities are traded.

Sidecar

A limited-existence SPV, often formed as an independent company, that provides a primary insurer additional capacity to write property catastrophe business or other short-tail lines through a quota share agreement with private investors.

Catastrophe risk exchange

A means through which a primary insurer can exchange a portion of its insurance risk for another insurer's.

Underwriting risk

A measure of the loss volatility of the types of insurance sold by an insurer.

Finite risk reinsurance

A nontraditional type of reinsurance in which the reinsurer's liability is limited and anticipated investment income is expressly acknowledged as an underwriting component.

Policies issued basis

A reinsurance attachment basis that covers only new policies issued on or after the reinsurance treaty's effective date.

In-force policies basis

A reinsurance attachment basis that covers only the unearned portion of in-force policies.

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 transactional audit.

cat bond

A type of insurance-linked security that is specifically designed to transfer insurable catastrophe risk to investors. A bond is issued with a condition that if the issuer suffers a catastrophe loss greater than specified amount, the obligation to pay interest and/or repay principal is deferred or forgiven.

Surplus note

A type of unsecured debt instrument, issued only by insurers, that has characteristics of both conventional equity and debt securities and is classified as policyholders' surplus rather than as a liability on the insurer's statutory balance sheet.

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?

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

An insurer that a state insurance department has granted a license to sell insurance to is best referred to as

An admitted insurer.

cat option

An agreement that gives the primary insurer the right to a cash payment from investors if a specified index of catastrophe losses reaches a specified level (the strike price). The catastrophe loss index, such as that provided by Insurance Services Office, Inc.'s (ISO's) Property Claim Services, keeps track of catastrophe losses by geographic region, by cause of loss, and by time of occurrence.

Contingent capital arrangement

An agreement, entered into before any losses occur, that enables an organization to raise cash by selling stock or issuing debt at prearranged terms after a loss occurs that exceeds a certain threshold.

The primary function of an aggregate excess of loss treaty is to

Stabilize a primary insurer's loss results.

Line of credit

An arrangement in which a bank or another financial institution agrees to provide a loan to a primary insurer in the event the primary insurer suffers a loss. The credit is prearranged so that the terms, such as the interest rate and principal repayment schedule, are known in advance of a loss. In exchange for this credit commitment, the primary insurer taking out the line of credit pays a commitment fee. A line of credit does not represent any risk transfer; they simply provide access to capital.

A reinsurer that is authorized to do business in the primary insurer's state of domicile is called

An authorized reinsurer.

Which one of the following statements about factors that affect reinsurance losses is most accurate?

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

Industry loss warranty (ILW)

An insurance-linked security that covers the primary insurer in the event that the industry-wide loss from a particular catastrophic event, such as an earthquake or hurricane, exceeds a predetermined threshold. The distinguishing characteristic of this instrument is that its coverage is triggered by industry losses as a whole, rather than only on the primary insurer's losses.

The second step in the reinsurance placement process is to develop a reinsurance agreement proposal. This step involves

Assessing the primary insurer's reinsurance needs and the reinsurance market resources that can satisfy them.

Incurred but not reported (IBNR) reserves Select one: A. Are not part of overall loss reserves. B. Serve, in part, to account for future growth of known losses. C. Provide estimates for unreported claims only. D. Can be estimated quite precisely.

B

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? Select one: A. Expenses are analyzed and reported by line of business in this section. B. Part 3 allocates expenses by three major functional areas. C. Expenses from reinsurance ceded are added into the net expenses included in this section. D. IBNR is one of the expenses that is part of the Part 3 allocation.

B

The amount of net underwriting gain or loss is shown on the primary insurer's Statement of Income, included in the National Association of Insurance Commissioners (NAIC) Annual Statement. On the Statement of Income, which one of the following is one of the items subtracted from the primary insurer's premiums earned to reach the net underwriting gain or loss amount? Select one: A. Net investment income earned B. Loss adjustment expenses incurred C. Policyholder dividends paid D. Net realized capital gains

B

The purpose of loss reserves is to Select one: A. Estimate future claims that have not yet occurred. B. Estimate the insurer's liability for losses that have occurred but have not yet been settled. C. Provide the insurer a reserve from which to draw should its net income be negative. D. Reduce the insurer's taxable income.

B

The three-part combination method of determining loss reserves places the greatest amount of weight in the earliest years on Select one: A. Industry average loss development factors. B. The loss ratio method. C. The loss triangle method. D. Case reserves.

B

Which one of the following statements is correct? Primary insurers generally are required to report claims to reinsurers as soon as they are aware of them. B. If a primary insurer's retention does not take inflation into account, the excess of loss reinsurer is unaffected. C. Many reserving techniques used by primary insurers are more difficult for an excess of loss reinsurer to apply. D. Legislative changes that benefit claimants are considered monetary inflation.

B

Which one of the following statements most accurately describes a weakness of the Bornhuetter-Ferguson method of determining loss reserves? Select one: A. It ignores the initial expected loss ratios of the insurer. B. It involves inherent subjectivity in selecting incurred but not reported (IBNR) factors. C. It relies on judgmental weights. D. It can only be used when the losses reported to the insurer are sufficiently mature.

B

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 homeowners 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 four-line surplus share treaty with a $200,000 line C. A five-line surplus share treaty with a $1,000,000 line D. An 80 % surplus share treaty with a $1,000,000 line

B. A four-line surplus share treaty with a $200,000 line would be the appropriate reinsurance agreement. The $200,000 line represents the maximum amount that Westfork can retain, and the four-line surplus share treaty provides an additional $800,000 ($200,000 × 4). This agreement would give Westfork a total underwriting capacity of $1 million.

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

Assume an actuary estimates losses at 80% of earned premium of $20 million, and that $3 million in losses have been paid. The insurer wants to establish a bulk reserve for reported losses—payment uncertain. Which one of the following represents the appropriate amount for the bulk reserve? Select one: A. $3 million B. $13 million C. $16 million D. $19 million

B. Reserves for reported losses when the amount of payment is uncertain can be calculated on a bulk basis by subtracting the amount already paid for losses from a certain percentage of total earned premium. The bulk reserve would be the estimated incurred loss of $16 million ($20 million premium x 80% loss ratio) - the $3 million of paid losses, which is $13 million.

Because of long loss development periods, reinsurers often do not have sufficient data to develop ultimate loss values. Which one of the following IBNR reserving methods would be best when little mature data is available?

Bornhuetter-Ferguson method

A reinsurer develops a price for an aggregate excess of loss treaty

By estimating the expected losses falling between the retention and the limit.

A sudden death provision might be triggered by all of the following, EXCEPT: A. The primary insurer's management changes. B. The primary insurer reduces its net retention. C. The primary insurer reduces its paid-in capital. D. The primary insurer increases its loss exposures.

C

Aggregate excess of loss treaty definitions of ultimate net loss and loss occurrence are often similar to definitions in other excess of loss treaties. One notable difference is that some aggregate excess of loss treaties do not define an occurrence. Under which one of the following circumstances would an aggregate excess of loss treaty not define an occurrence? Select one: A. When the treaty applies on a losses occurring basis B. When there is an internal retention under the treaty C. When the primary insurer's retention is stated as a loss ratio D. When there is an outside retention under the treaty

C

Schedule P of the NAIC Annual Statement shows detailed information on which one of the following? Select one: A. Assumed reinsurance B. Bonds acquired during the year C. Paid and reserved losses D. Premiums written

C

Which one of the following best describes the function of an aggregate of excess of loss treaty? Select one: A. It provides limits over large single events that exceed an insurer's primary limits for a single event. B. It gives the insurer the right to a cash payment if a specified index of catastrophe losses reaches a specified level. C. It covers an accumulation of losses from several independent events over a specified period. D. It provides protection to a primary insurer before the application of other reinsurance recoveries to protect those treaties.

C

Which one of the following best explains why a primary insurer's data may not be very useful in the pricing of an aggregate excess of loss treaty? Select one: A. Reinsurers tend to use their own individual modeling methods. B. Data from primary insurers may have significant errors. C. Loss accumulations that exceed an aggregate excess attachment point are generally infrequent. D. The risk tolerance of the primary insurer differs from that of the reinsurer.

C

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

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

C

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 Select one: A. The impact on policyholder surplus. B. Reinsurance amounts applied. C. Premium by type of insurance. D. The number of claims closed.

D

A primary insurer is exposed to both underwriting and investment risk. An investment risk that may cause the need for additional reinsurance protection would be which one of the following? Select one: A. A low dividend pay out B. A high capital gain tax C. An increased cost of capital D. A lack of asset liquidity

D

Both primary insurers and reinsurers must maintain reserves for expected future loss payments. Which one of the following best describes the reserves that a reinsurer must maintain? Select one: A. Amounts it is obligated to pay to claimants that bring claims B. Amounts that have already been paid out to claimants C. Amounts estimated to defend and settle third party claims D. Amounts obligated in the future to pay to primary insurers

D

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. Collateral deficiencies from Part 6 are reported on the asset side of the balance sheet. B. If recoverables from certified reinsurers are fully secured, no provision for overdue reinsurance must be made for past due balances over 90 days. C. Certified reinsurers are not classified as "slow paying" in Part 6 until payments are more than one year past due. D. Part 6 provides a provision for the calculation of reinsurer collateral deficiencies.

D

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? Select one: A. Reinsurance premiums ceded B. Known case loss reserves recoverable C. IBNR loss reserves recoverable D. Ceded balances payable to reinsurers

D

Part 2 of the National Association of Insurance Commissioners (NAIC) Underwriting and Investment Exhibit, which supports an insurer's Statement of Income, shows losses by type of insurance. Part 2 uses premium earned data from Part 1 to calculate a ratio for each type of insurance. This ratio is the Select one: A. Combined ratio. B. IBNR ratio. C. Expense ratio. D. Loss ratio.

D

Schedule P of the NAIC Annual Statement combines salvage and subrogation into one category because they both have which one of the following effects? Select one: A. They increase liabilities on the balance sheet. B. They reduce unpaid losses due to sale of damaged property. C. They reduce unpaid losses due to recovery from third parties. D. They reduce paid and reserved losses.

D

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? Select one: A. Defense and cost containment expenses are not included in the information provided. B. Newly reported claims that have no specific case reserves are not included in the data. C. Reopened claims are intentionally not included in this information so as not to distort it. D. The data shown forms a loss development triangle.

D

The correct formula for incurred losses is Select one: A. Incurred losses = paid losses. B. Incurred losses = paid losses + loss reserves. C. Incurred losses = loss reserves. D. Incurred losses = paid losses + loss reserves + loss adjustment expense reserves.

D

Which one of the following statements about the loss ratio method of establishing bulk reserves for incurred but not reported (IBNR) losses is most accurate? Select one: A. The loss ratio method assumes that the ultimate loss ratio will exceed the loss ratio that was considered when calculating premium rates B. The loss ratio method is preferred over the percentage method for estimating property loss reserves. C. The loss ratio method assumes that the ultimate loss ratio will be less than the loss ratio that was considered when calculating premium rates. D. The loss ratio method should only be used for the first year or two after losses are incurred.

D

Reinsurance intermediaries provide all of the following services, EXCEPT: Select one: A. Premium negotiation B. Advice on claim handling C. Reinsurance program design D. Insurance risk assumption

D.

When accounting for accident-year losses for year 20X6, which one of the following would be included? Select one: A. A loss payment in 20X6 for a loss that occurred in 20X4 B. A loss payment in 20X7 for a loss that occurred in 20X7 C. A reserve change in 20X6 for a loss that occurred in 20X5 D. A reserve change in 20X7 for a loss that occurred in 20X6

D. Incorrect. An accident-year method aggregates incurred losses for a given period (such as twelve months) using all incurred losses for insured events that occurred during that period. Any losses that occurred in previous or later periods are not included.

Extra Contractual Obligations

Damages awarded by the court against an insurer which are outside the provisions of the insurance policy, due to fraud, bad faith or negligence of the insurer in handling a claim.

Policy-level average annual loss (AAL) information generated by catastrophe models is used by reinsurers to

Develop catastrophe reinsurance rates.

The liability of the reinsurer clause in a surplus share reinsurance treaty

Establishes the basis of the cession to the reinsurer.

Insurance derivative

Financial contract whose value is based on the level of insurable losses that occur during a specific time period.

Schedule F of the National Association of Insurance Commissioners (NAIC) Annual Statement contains

Information pertinent to the insurer's reinsurance activities.

The net retention clause is designed for surplus share treaties and usually states whether or not the primary insurer

Is permitted to use underlying reinsurance to further reinsure its net retention.

Which one of the following is true regarding the retention and limits clause in aggregate excess of loss treaties?

It is unusual for an aggregate excess of loss treaty to contain a reinstatement provision.

The ultimate net loss clause in a catastrophe reinsurance treaty usually states that

Loss adjustment expenses of the primary insurer incurred for catastrophe losses are included.

Factors affecting retention selection

Maximum amount the primary insurer can retain Maximum amount the primary insurer wants to retain Minimum retention sought by the reinsurer Co-participation provision

Factors Affecting Reinsurance Limit Selection

Maximum policy limit Extracontractual obligations Loss adjustment expenses Clash cover Catastrophe exposure

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

Net retention clause.

State guaranty funds

Nonprofit, unincorporated associations established in all states to pay the outstanding claims of insolvent primary insurers.

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

Output controls.

An insurer's portfolio reinsurance transactions are shown on which one of the following parts of Schedule F of the National Association of Insurance Commissioners Annual Statement?

Part 2

Which one of the following best explains why aggregate excess reinsurers must use statistical techniques to set retentions and limits?

Primary insurers seldom have an accumulation of historical losses that would have exceeded the attachment point of the aggregate excess reinsurance.

__________________ is the appropriate choice if a rapidly growing primary insurer needs only surplus relief.

Pro rata reinsurance

When selecting a retention for its reinsurance program, the primary insurer must consider the maximum amount that it can retain. This amount is a function of the primary insurer's financial strength and

Regulatory requirements.

Which one of the following clauses specifies the quota share percentage assumed by a reinsurer?

Reinsuring

Which one of the following common clauses in a quota share reinsurance treaty describes the policies covered and identifies the basis of attachment?

Reinsuring

The average method of case reserving is most suitable for those types of insurance where claims are

Reported and paid promptly.

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?

Risks attaching

A property line guide for a risk being placed into a surplus share treaty

Suggests a net retention.

Under a property per risk excess of loss treaty the retention and limits clause specifies

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

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? Select one:

The NAIC Accreditation program

A sliding scale ceding commission is calculated by adjusting the ceding commission percentage based on

The actual loss ratio under the treaty.

When choosing between a direct writing and a broker marketing system for the purchase of reinsurance, a primary insurer should be aware of the differences between the two systems. A potential drawback of the broker marketing system versus the direct writing system is

The chance of communication misunderstandings.

The senior management team at Primary Insurer must make a decision on how much reinsurance should be purchased and how much risk should be retained. The reinsurance program that senior management selects should reflect the risk tolerance of which one of the following?

The insurer's board of directors

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.

All of the following are true regarding the original conditions clause, EXCEPT:

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

Strike price

The price at which the stock or commodity underlying a call option (such as a warrant) or a put option can be purchased (called) or sold (put) during a specified period.

Which one of the following is true regarding the reinsurance premium clause in a property per risk excess of loss treaty?

The reinsurer expects to receive some reinsurance premium even if no losses are incurred.

A primary insurer's historical loss data is typically of limited use to treaty reinsurers in pricing aggregate excess of loss treaties for which one of the following reasons?

The relevant types of losses occur too infrequently for the loss data to be useful.

Securitization of risk

The use of securities or financial instruments (for example, stocks, bonds, commodities, financial futures) to finance an insurer's exposure to catastrophic loss.

Which one of the following is a benefit of contingent surplus notes as an alternative to traditional reinsurance?

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

A small primary insurer may purchase an aggregate excess of loss treaty

To protect its policyholder surplus.

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.

Losses Occurring Basis

When a reinsurer assumes liability on a losses occurring basis, it becomes responsible for all losses occurring on or after the reinsurance treaty's inception date, regardless of when the underlying policy was issued.

if the previous treaty is not run off and there is now a risk attaching policy in place, what could happen

a coverage gap would exist in the primary insurer's reinsurance program.

ULAE is usually estimated as

a percentage of the sum of incurred losses and ALAE

Which one of the following individuals would normally set the level of bulk reserves for an insurer?

actuary

LAE is a factor to consider when selecting reinsurance limits because

adjustment expenses are generally added to the amount of loss and not pro rated between the primary insurer and reinsurer

line of credit does not represent

any risk transfer

The _______ method is most suitable for types of insurance in which claims are relatively frequent, reported and paid promptly, and not subject to extreme variations, such as automobile collision

average

why are line guides mostly used in property insurance

because total property loss exposures are easier to quantify loss exposures

what ratio can surplus share treaties help decrease?

capacity

output controls

checking to make sure all the data from the input system was put correctly on the output reports

Clash cover applies when

claims from two or more policies arise as a result of the same occurrence.

property line guides usually include property loss attributes such as

construction type, occupancy classification, public protection classification

If the major concern is loss ratio stability or large line capacity, __________ reinsurance may be an appropriate choice.

excess of loss

If a service of suit clause is not included with a reinsurance treaty written by an international reinsurer that is not licensed or otherwise authorized to sell reinsurance in the United States, the primary insurer would be

forced to bring a suit in the reinsurer's home country

Surplus share treaties are generally less effective than quota share treaties in providing surplus relief because

less premium is ceded and therefore less ceding commission is received.

The sunset clause

limits the time after the treaty expiration during which occurrences can be reported to the reinsurer.

loss ratio method

long-tail, assumed ultimate loss ratio = loss ratio when originally calculated

with this in place, the reinsurer will be responsible for all losses occurring on or after the treaty's inception date, regardless of when the underlying policy was issued.

losses occurring during

Factors that modify the reinsurance rate when exposure rating is used to price casualty excess of loss treaties:

o Allocated loss adjustment expenses o Reinsurer's expenses o Extra-contractual obligations and excess of policy limits coverage o Clash cover o Policy limit mix

processing controls

once the data is put in, how does it get processed

Cost and minimum profit percentage =

overhead - brokerage + investment income offset - minimum profit percentage

line of credit strictly

provides access to capital

The surplus relief effect =

provisional commission x ceded unearned premium

ceded written premiums =

quota share percentage X subject written premiums

ceded earned premiums

quota share percentages X subject earned premiums