Assignment 13 - Reinsurance Principles and Concepts

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

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

A long-term relationship with a reinsurer enables a primary insurer to consistently fulfill producers' requests for insurance

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

A reinsurer whose employees deal directly with primary insurers

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

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

Pro rata reinsurance is the appropriate choice when which one of the following is the main concern related to a primary insurer's rapid growth?

Drain on policyholders' surplus

Which one of the following is the term used for reinsurance of individual loss exposures 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?

Facultative reinsurance

A reinsurance program is the same as a reinsurance agreement. True or false?

False

When the ceding commission is a fixed percentage of the ceded premium with no adjustment for the primary insurer's loss experience, the ceded commission is known as a

Flat commission

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

A primary insurer that plans to grow is likely to need additional reinsurance for all of the following reasons, EXCEPT

Growth could lead to geographic diversification of loss exposures

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

A primary insurer uses reinsurance to

Indemnify it for some or all of the financial consequences of certain loss exposures covered by the insurer's policies

Insurance companies face the uncertainty that the premiums they have collected will not be adequate to pay the losses. This uncertainty is called

Insurance risk

The maximum amount of insurance or limit of liability that an insurer will accept on a single loss exposures is called a

Line

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

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

Beta Insurance Company (BIC) is a small, regional personal lines insurer. Four years ago, BIC hired a new Vice President of Marketing to grow the business. A combination of factors led to BIC growing by 30% in each of the past two years. The senior management team anticipates continued growth at this rate for another five years. Which one of the following types of reinsurance will be most effective in providing the surplus relief BIC will need to support its growth plans?

Pro rata

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?

Pro rata

Blue Sky Enterprises wants to join with a small group of other organizations to create an entirely new type of medical device for heart transplant patients. ABC Insurer is interested in working with the group to meet their insurance needs. However, ABC has no experience in the biotechnology field. Which function of reinsurance would be most beneficial to ABC Insurer?

Provide underwriting guidance

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

An established regional commercial property insurer decides to increase its market share by 20% per year over the next three years. Currently, the insurer is experiencing a premium-to-surplus ratio of 4 to 1. Which one of the following types of reinsurance treaties will be most effective in providing the insurer with needed surplus relief?

Quota share

Which one of the following is not a source of reinsurance?

Reinsurance intermediaries

The amount of risk retained by a primary insurer under its reinsurance program is influenced by

Reinsurer requirements for retention

Reinsurers may transfer part of the liability that they have accepted in reinsurance agreements to other reinsurers, known as

Retrocessionaires

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

Plastics Manufacturing Company (PMC) operates globally with property values approaching $100 million. Liability exposures are considerable particularly for products liability. Because of its size, PMC decides to form a captive insurer. PMC's board of directors is unwilling to risk huge losses as the captive begins operations. Which function of reinsurance would be most beneficial to PMC and its captive insurer?

Stabilize loss experience

Pro rata reinsurance that covers policies whose amounts of insurance exceed a predetermined dollar amount, or line, is called

Surplus share reinsurance

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)

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 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

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

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

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 reinsurance agreement that covers an entire class or portfolio of loss exposures is known as

Treaty reinsurance

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

Which one of the following types of reinsurance treaties has the advantage of enabling a primary insurer to retain a larger proportion of the small loss exposures that are within its financial capability to absorb, while maintaining a safer and smaller retention on larger loss exposures?

Variable quota share

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

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