Chapter 1 Exam

Which one of the following statements is correct regarding treaty reinsurance? - Treaty reinsurance agreements are designed to address a primary insurer's need to insure atypical loss exposures. - A long-term relationship with a reinsurer usually enables primary insurers to consistently fulfill producers' requests to place insurance with them. - Treaty reinsurance agreements are usually designed to allow underwriters to exercise discretion in determining which loss exposures to cede to the treaty reinsurers. - The price and terms of reinsurance agreements are standard with little negotiation between the parties.

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 describes the term "direct writing reinsurer" - A reinsurer that writes narrowly defined classes of business as directed by state insurance regulators - A reinsurer that sells reinsurance coverage directly to insureds - A reinsurer that writes business under the direction of a reinsurance intermediary - A reinsurer whose employees deal directly with primary insurers

A reinsurer whose employees deal directly with primary insurers

Reinsurers help primary insurers increase their large-line capacity by - Supplementing primary insurers' earnings. - Accepting liability for loss exposures that the primary insurer is unwilling or unable to retain. - Providing high layers of insurance above the underlying limits. - Influencing regulations related to the maximum amount of insurance allowed.

Accepting liability for loss exposures that the primary insurer is unwilling or unable to retain

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. - Facultative reinsurance is designed to address the need to reinsure many loss exposures over a period of time. - Primary insurers wishing to reinsure a few loss exposures are more likely to use treaty reinsurance than facultative reinsurance. - Treaty reinsurance arrangements allow the primary insurer to select which risks will be transferred to the reinsurer on a case-by-case basis.

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

Reinsurance is best described as - A transfer of claim-payment responsibilities from a primary insurer to a reinsurer. - An agreement between a primary insurer and a ceding company. - An agreement by a reinsurer to indemnify a primary insurer for losses. - A transfer of a primary insurer's retention to a reinsurer.

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

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

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

Which one is true of a reinsurance agreement bc it is a contract of utmost good faith - Both parties to the contract are bound to disclose all relevant facts. - An insured's proceeds should not exceed its financial losses from an insured event. - The insurer can refuse to perform if the insured does not satisfy certain policy conditions. - Any ambiguities are interpreted in favor of one party to the contract.

Both parties to the contract are bound to disclose all relevant facts

Callaway Insurance Company is interested in gradually expanding its property insurance business into the wind-prone coastal areas of the southern U.S. In planning this expansion, on which one of the following goals should Calloway's reinsurance program most likely focus? - Catastrophe protection - Surplus relief - Underwriting guidance - Large-line capacity

Catastrophe protection

Which one of the following statements is correct regarding treaty reinsurance - The integrity and experience of the primary insurer's management are generally not factors that treaty reinsurers consider. - If reinsurers are comfortable with a primary insurer's published underwriting guidelines, they are generally not concerned with the degree to which those guidelines represent the insurer's actual practices. - If treaty reinsurance agreements permitted primary insurers to choose which loss exposures they ceded, the reinsurer would be exposed to adverse selection. - Primary insurers usually make treaty reinsurance agreements so their underwriters have discretion in using that reinsurance.

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

Smith Enterprises is a national plastics distributor with property values in excess of $20 million spread throughout the country. Smith Enterprises wants to insure all of its property exposures with the same insurer. Which function of reinsurance would be most beneficial to Smith's primary insurer? - Provide catastrophe protection - Increase large-line capacity - Stabilize loss experience - Provide underwriting guidance

Increase large-line capacity

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. - Transfer all of its insurer's insurance risk to another insurance entity. - Shift responsibility for claim handling to another insurance entity. - Confirm the adequacy of the premiums it charges to its insureds.

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 - Financial risk - Market risk - Pure risk - Insurance risk

Insurance risk

XYZ Insurer wants to start selling a new type of insurance for spacecraft. It has no experience in this area. Which function of reinsurance is most likely to be of value to XYZ Insurer? - Provide surplus relief - Provide underwriting guidance - Provide catastrophe protection - Stabilize loss experience

Provide underwriting guidance

Which one of the following statements regarding reinsurance is true? - Once risk is transferred to a reinsurer, the reinsurer cannot transfer the risk to another reinsurer. - Reinsurance transfers the obligations that a primary insurer has to its insured to the reinsurer. - The ceding company is the insurer that agrees to indemnify another insurer in case of loss. - Reinsurance agreements typically require the primary company to retain part of its original liability.

Reinsurance agreements typically require the primary company to retain part of its original liability

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 - Professional reinsurer - Guaranty association - Reinsurance department of a primary insurer

Reinsurance pool

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

Separates the reinsurance operations to maintain the confidentiality of insurer information

Which one of the following best describes why a group of insurers would choose to form a reinsurance pool, syndicate, or association? - To eliminate the need for any of the members to maintain a dedicated reinsurance department - To avoid purchasing treaty reinsurance - So that the members can share the loss exposures of the group, usually through reinsurance - So that the members can deal with a direct writing reinsurer

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

One reason that primary insurers purchase reinsurance for catastrophes is to - Increase large-line capacity - Satisfy regulatory requirements for reinsurance - Reduce policyholders' surplus to acceptable levels - Stabilize insurer earnings

Stabilize insurer earnings

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. - Facultative reinsurance is generally not an option for insuring loss exposures that are inconsistent with the primary insurer's typical portfolio. - The administrative costs associated with placing facultative reinsurance are relatively low. - Facultative reinsurance is generally not an option for insuring classes of loss exposures that are excluded under treaty 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 the primary business purpose of a professional reinsurer? - To offer reinsurance to affiliated insurers - To create pools so that groups of insurers can share the loss exposures of the group - To create a syndication of reinsurance intermediaries - To serve insurers' reinsurance needs

To serve insurers' reinsurance needs

One reason that reinsurance treaties usually require primary insurers to cede all risks within identified classes is to - Ensure adequate reinsurance premiums for reinsurers. - Nullify the effects of poor underwriting by primary insurers. - Reduce the need for facultative reinsurance. - Avoid adverse selection against reinsurers.

avoid adverse selection against reinsurers

Treaty reinsurance provides primary insurers with the - Necessary large-line capacity for exposures that exceed the facultative reinsurance limits. - Option to reinsure identified classes of business. - Opportunity to cede individual loss exposures as it chooses. - Certainty needed to formulate underwriting policy and develop underwriting guidelines.

certainty needed to formulate underwriting policy and develop underwriting guidelines

Reinsurance pools, syndicates, and associations are - Advisory organizations that provide information about primary insurers to reinsurers. - Professional development organizations for reinsurance intermediaries. - Groups of insurers that share the loss exposures of the group, usually through reinsurance. - Service organizations that develop loss costs and draft contract wordings for reinsurers.

groups of insurers that share the loss of the group, usually through reinsurance

Reinsurance pools, syndicates, and associations can be formed by - Regulators when they determine that the reinsurance market is inadequately competitive. - Groups of reinsurers whose retrocession needs have not been adequately met by existing reinsurers. - Reinsurance intermediaries to meet their clients' needs. - Financial institutions for use as a bank funding mechanism.

reinsurance intermediaries to meet their clients' needs

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 - That covers an entire class or portfolio of loss exposures, and the reinsurer can typically accept or reject any loss exposures submitted. - 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. - In which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer must accept all loss exposures submitted.

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