Chapter 8 CPCU 520

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?

$0

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

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

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

Brookgreen Insurance has a 40% quota share treaty with Cypress Reinsurance. Policy A has a limit of $50,000, a premium of $2,000, and a loss of $5,000. How much of the premium will Cypress Reinsurance receive?

$800

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

Green Insurance Company has a surplus share treaty with Blue Reinsurer and retains a line of $25,000. The treaty contains nine lines and provides for a maximum cession of $225,000. Green Insurance issues a policy insuring a building for $25,000 for a premium of $400, with one loss of $8,000. What percentage of insurance, premiums, and losses is ceded to Blue Reinsurer?

0%

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%

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%

Red Insurance Company has a surplus share treaty with Black Reinsurer and retains a line of $25,000. The treaty contains nine lines and provides for a maximum cession of $225,000. Red Insurance issues a policy insuring a building for $200,000 for a premium of $1,900 with one loss of $60,000. What percentage of insurance, premiums, and losses is ceded to Black Reinsurer?

87.5%

Greatview Insurance has only been in business for five years and has limited capital. It would like to grow its book by expanding into the general liability market. Senior management is concerned with the difficulty in forecasting loss amounts and the loss adjustment expenses associated with liability losses. They decide that they need to expand with caution and limit Greatview's exposure through reinsurance. Which one of the following reinsurance arrangements would allow Greatview to proportionally share the liability limits, premium, losses, and loss adjustment expenses with a reinsurer, and also provide surplus relief?

A 70% quota share treaty

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 four-line surplus share treaty with a $200,000 line

One common feature of quota share reinsurance agreements is that the agreement states

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

Which one of the following primary insurers would most likely use a catastrophe risk exchange as an alternative to traditional reinsurance?

A primary insurer with a geographic concentration of loss exposures

Which one of the following statements concerning a reinsurance intermediary (broker) is true?

A reinsurance intermediary negotiates the reinsurance agreement between the ceding company and the reinsurer.

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

A reinsurer whose employees deal directly with primary insurers

Reinsurers help primary insurers increase their large-line capacity by

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.

Which one of the following are shared by the primary insurer and the reinsurer in pro rata reinsurance transactions?

Amounts of insurance

Reinsurance is best described as

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

Reinsurance is

An agreement under which the reinsurer indemnifies the primary insurer for losses sustained.

A working cover is

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

A reinsurance arrangement that is specified as "95% of $10 million xs $5 million" is

An excess of loss reinsurance agreement with an attachment point of $5 million, and a 5% co-participation provision of the $10 million layer.

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 is correct with regard to an insurer's line and large-line capacity?

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

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.

One reason that reinsurance treaties usually require primary insurers to cede all risks within identified classes is to

Avoid adverse selection against reinsurers.

Which one of the following is true of a reinsurance agreement because it is a contract of utmost good faith?

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

Treaty reinsurance provides primary insurers with the

Certainty needed to formulate underwriting policy and develop underwriting guidelines.

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

Durham Insurance writes package policies for small to mid-size commercial properties. Durham has an excess of loss treaty reinsurance agreement with Wells Reinsurance which includes a profit-sharing arrangement. One of Durham's current policyholders has purchased a residential property with a swimming pool. While the treaty does not specifically exclude exposure for swimming pools, this is not an exposure that Durham typically covers and it would like to protect the treaty from the exposure. Which one of the following is the best way for Durham to handle this situation?

Durham Insurance should arrange for facultative reinsurance for the high-hazard liability of the swimming pool and remove the exposure from the treaty.

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

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?

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

Growth could entail expanding into markets with greater coverage requirements, Variability of the loss ratio on new policies could cause instability of underwriting results, and Growth usually causes a drain on policyholders' surplus

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?

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.

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.

Professional reinsurers

Interact with other insurers either directly or through intermediaries.

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?

Investment income

Facultative reinsurance

Involves more administrative expense than treaty reinsurance transactions.

Surplus share reinsurance

Is typically used only with property insurance.

An insurer's ability to provide larger amounts of insurance for property loss exposures, or higher limits of liability for liability loss exposures, than it is otherwise willing to provide is

Large-line capacity.

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 impact of loss adjustment expenses in the selection of reinsurance program retentions and limits?

Loss adjustment expenses are generally added to the loss amount and should be carefully considered when selecting retentions and limits.

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.

Surplus share reinsurance is useful when the primary insurer

Needs to increase its large-line capacity

Treaty reinsurance

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

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

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

Policy limits offered by the primary insurer, Potential for multiple primary policies to be involved in a single occurrence, and Potential for excess of policy limits losses

New Insurance Company noticed many insurers were withdrawing from the contractor's liability insurance market. The company believed this was a great opportunity to enter this market and earn substantial profits. New Insurance, however, lacked the experience and expertise to successfully market contractor's liability insurance, and their participation in this market was a dismal failure. New Insurance Company decided to formally withdraw from this market and to shift all future responsibility for contractor's liability claims to a reinsurer. What type of reinsurance is specifically designed to cover a whole class of business like New Insurance Company's contractor's liability insurance?

Portfolio reinsurance

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

Per risk excess of loss reinsurance covers

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

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

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 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

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.

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 statements regarding reinsurance is true?

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

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.

Reinsurance pools, syndicates, and associations can be formed by

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

Reinsurance pool.

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 (syndicates) can offer reinsurance to insurers that are not members of the pool.

The following are sources of reinsurance

Reinsurance pools, syndicates, and associations, Professional reinsurers, Reinsurance departments of primary insurers

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.

When a primary insurer offers reinsurance it usually

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

Quota share reinsurance is a type of pro rata reinsurance in which the primary insurer and the reinsurer

Share the amounts of insurance using a fixed percentage

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

One reason that primary insurers purchase reinsurance for catastrophes is to

Stabilize insurer earnings.

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

A replenishment of policyholders' surplus provided by the ceding commission paid to the primary insurer by the reinsurer is

Surplus relief.

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.

Which one of the following statements is true regarding the effect of the type of insurance sold on the reinsurance needs of a primary insurer?

The insurance products offered vary in loss stability which affects the primary insurer's ability to project loss experience.

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.

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.

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.

The ceding commission is paid by

The reinsurer to the ceding company.

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 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.

Crimson Casualty Company began insurance operations last year. The company experienced phenomenal success and wrote far more premiums than expected. A representative from the state insurance department contacted Crimson Casualty and warned the company that it was growing too fast and risking insolvency. The insurance regulator added, "Of course you can use reinsurance to help remedy your situation." The regulator was referring to which one of the following functions of reinsurance?Crimson Casualty Company began insurance operations last year. The company experienced phenomenal success and wrote far more premiums than expected. A representative from the state insurance department contacted Crimson Casualty and warned the company that it was growing too fast and risking insolvency. The insurance regulator added, "Of course you can use reinsurance to help remedy your situation." The regulator was referring to which one of the following functions of reinsurance?

Using reinsurance to provide surplus relief

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