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Reinsurance primarily serves to protect the ceding company from the financial impact of large claims events by transferring some of its liabilities.
Answer: True
The source explicitly states that the primary purpose of reinsurance is to protect the initial insurer, the ceding company, from the financial impact of large claims events by transferring some of its liabilities.
In a reinsurance transaction, the company that buys the reinsurance policy is known as the reinsurer, while the company that issues it is the ceding company.
Answer: False
The source clarifies that the company purchasing the reinsurance policy is the 'ceding company,' and the company issuing it and accepting liabilities is the 'reinsurer.' The statement reverses these roles.
Assumed reinsurance refers to the business undertaken by an insurance company when it transfers its own risks to another insurer.
Answer: False
The source defines 'assumed reinsurance' as the business undertaken when an insurance company *accepts* reinsurance policies from other companies, meaning it takes on risk, rather than transferring its own.
What is the primary purpose of reinsurance?
Answer: To protect the initial insurer from the financial impact of large claims events.
Which term refers to the insurance company that purchases a reinsurance policy?
Answer: The ceding company
What does 'assumed reinsurance' mean for an insurance company?
Answer: It refers to the business undertaken when it accepts reinsurance policies from other companies.
Beyond risk management, ceding companies may use reinsurance to reduce capital requirements, for tax mitigation, or other financial objectives.
Answer: True
The source confirms that in addition to risk management, reinsurance is utilized by ceding companies to reduce capital requirements, for tax mitigation strategies, or other financial objectives.
The ultimate goal of a reinsurance program is to increase an insurance company's overall exposure to potential losses.
Answer: False
The source explicitly states that the ultimate goal of a reinsurance program is to *reduce* an insurance company's overall exposure to potential losses by transferring a portion of that risk.
Reinsurance allows an insurer to issue policies with higher coverage limits than it could otherwise manage on its own.
Answer: True
The source indicates that reinsurance enables an insurer to issue policies with higher coverage limits by transferring a portion of the risk, allowing the primary insurer to take on more substantial risks.
Reinsurance contributes to 'income smoothing' by increasing the volatility of an insurance company's financial results.
Answer: False
The source states that reinsurance helps achieve 'income smoothing' by *absorbing large losses*, making financial results *more predictable* and *less volatile*, directly contradicting the statement.
An insurance company might be motivated by arbitrage if it can purchase reinsurance at a higher premium than it charges its policyholders.
Answer: False
The source explains that arbitrage motivation arises when an insurance company can purchase reinsurance coverage at a *lower* premium than it charges its policyholders, allowing it to profit from the difference.
Reinsurers may offer lower premiums due to factors like economies of scale, superior underwriting expertise, or a more favorable tax regime.
Answer: True
The source lists economies of scale, superior underwriting expertise, and a more favorable tax regime as potential reasons why a reinsurer might offer lower premiums.
Reinsurers typically hold larger actuarial reserves than ceding companies to cover potential losses.
Answer: False
The source suggests that reinsurers *may be able to hold smaller* actuarial reserves than ceding companies, especially if they believe the primary insurer's premiums are overly conservative, or due to portfolio diversification.
An insurance company might seek a reinsurer's expertise primarily for managing its internal administrative tasks.
Answer: False
The source indicates that an insurance company seeks a reinsurer's expertise primarily for accurately setting premiums, especially for specialized or complex risks, not for managing internal administrative tasks.
Besides risk management, which of the following is a purpose for which ceding companies utilize reinsurance?
Answer: To reduce their capital requirements.
How does reinsurance enable insurers to issue policies with higher limits?
Answer: By transferring a portion of the risk, allowing the primary insurer to take on more substantial risks.
An insurance company might be motivated by arbitrage to purchase reinsurance if:
Answer: It can purchase reinsurance coverage at a lower premium than it charges its policyholders.
Which of the following is NOT a reason a reinsurer might be able to offer lower premiums than a primary insurer?
Answer: A less diverse portfolio of assets and liabilities.
Why might an insurance company seek a reinsurer's expertise?
Answer: To accurately set premiums, especially for specialized or complex risks.
The two basic methods of reinsurance, Facultative and Treaty, primarily differ in the duration of the reinsurance contract.
Answer: False
While duration can be a factor, the source indicates that Facultative and Treaty reinsurance primarily differ in *how* the coverage is structured and applied (individually negotiated vs. covering a share of all policies), not solely duration.
Facultative Reinsurance is typically purchased for unique risks not adequately covered by existing treaties or for amounts exceeding treaty limits.
Answer: True
The source states that Facultative Reinsurance is negotiated individually for specific policies, often for unique risks not covered by existing treaties or for amounts exceeding treaty limits.
Facultative Reinsurance generally involves lower underwriting expenses due to its standardized nature.
Answer: False
The source indicates that Facultative Reinsurance involves *higher* underwriting expenses because each risk is individually assessed and administered, rather than being standardized.
Treaty Reinsurance contracts are typically negotiated individually for each specific insurance policy.
Answer: False
The source clarifies that Treaty Reinsurance covers a specified share of *all* policies within its scope, typically established on an annual basis, contrasting with Facultative Reinsurance which is negotiated individually for each policy.
Under a 'facultative-obligatory' Treaty Reinsurance contract, the reinsurer is obligated to accept risks, but the insurer can choose which risks to cede.
Answer: True
The source defines 'facultative-obligatory' reinsurance as a treaty where the insurer can choose which risks to cede, but the reinsurer is obligated to accept those chosen risks.
Over the past three decades, the property and casualty insurance sectors have seen a significant shift from non-proportional to proportional reinsurance.
Answer: False
The source states that there has been a significant shift in the property and casualty insurance sectors *from proportional to non-proportional* reinsurance, not the other way around.
Facultative reinsurance contracts are typically longer and more complex than treaty reinsurance documents.
Answer: False
The source indicates that Facultative contracts are typically *brief 'facultative certificates'*, while treaty contracts are *longer and more complex documents*.
What are the two fundamental methods of reinsurance?
Answer: Facultative and Treaty Reinsurance
For what types of risks is Facultative Reinsurance typically purchased?
Answer: Unique risks not adequately covered by existing treaties or exceeding treaty limits.
What is an operational implication of Facultative Reinsurance?
Answer: It involves higher underwriting expenses because each risk is individually assessed.
How does Treaty Reinsurance typically operate?
Answer: It covers a specified share of all policies issued by the ceding company within its scope.
What is the characteristic of 'facultative-obligatory' reinsurance under a Treaty contract?
Answer: The insurer can choose which risks to cede, but the reinsurer is obligated to accept them.
What shift has occurred in property and casualty insurance sectors regarding treaty reinsurance over the past three decades?
Answer: A shift from proportional to non-proportional reinsurance.
How do facultative and treaty reinsurance contracts differ in their documentation?
Answer: Facultative contracts are typically brief 'facultative certificates,' while treaty contracts are longer documents.
Surplus relief, which increases an insurance company's capacity to write more business, is provided by non-proportional treaties.
Answer: False
The source clearly states that 'surplus relief' is provided by *proportional treaties*, not non-proportional treaties.
Proportional reinsurance involves reinsurers assuming a predetermined percentage share of every policy issued by the primary insurer.
Answer: True
The source defines proportional reinsurance as reinsurers assuming a predetermined percentage share of every policy issued by the primary insurer, receiving the same percentage of premiums and paying the equivalent percentage of claims.
A 'ceding commission' is a payment made by the primary insurer to the reinsurer to cover administrative costs.
Answer: False
The source defines a 'ceding commission' as a payment made by the *reinsurer to the primary insurer* to cover acquisition and administration costs, and to compensate for lost profit.
A quota share arrangement is a type of proportional reinsurance where a fixed percentage of every insurance policy is reinsured.
Answer: True
The source describes a quota share arrangement as a type of proportional reinsurance where a fixed percentage of every insurance policy is reinsured, meaning the reinsurer takes a consistent share.
Ceding companies typically opt for a quota share arrangement to reduce their overall underwriting capacity.
Answer: False
The source states that ceding companies choose quota share arrangements to *increase* their underwriting capacity when lacking sufficient capital, not to reduce it.
Under surplus reinsurance, the primary insurer retains the full amount of each risk up to a set retention limit, reinsuring only the excess.
Answer: True
The source explains that in surplus reinsurance, the ceding company sets a retention limit, and the primary insurer retains risk up to this limit, with only the portion exceeding it being reinsured.
What is 'surplus relief' in the context of reinsurance?
Answer: The increased capacity an insurance company gains to write more business or offer larger policy limits.
Which type of reinsurance provides 'surplus relief'?
Answer: Proportional treaties
In proportional reinsurance, what is a 'ceding commission'?
Answer: A payment made by the reinsurer to the primary insurer to cover acquisition and administration costs.
What is a 'quota share' arrangement within proportional reinsurance?
Answer: A type of proportional reinsurance where a fixed percentage of every insurance policy is reinsured.
Why would a ceding company primarily opt for a quota share arrangement?
Answer: To significantly increase its underwriting capacity when lacking sufficient capital.
How does 'surplus reinsurance' function?
Answer: The primary insurer retains the full amount of each risk up to a limit, and only the excess is reinsured.
Non-proportional reinsurance means the reinsurer's liability is a fixed percentage of each policy, similar to proportional reinsurance.
Answer: False
The source clarifies that in non-proportional reinsurance, the reinsurer's liability is *not* a fixed percentage of each policy; instead, it pays out only if total claims exceed a predetermined amount.
The main forms of non-proportional reinsurance are excess of loss and stop loss.
Answer: True
The source identifies excess of loss and stop loss as the main forms of non-proportional reinsurance.
Per Risk XL reinsurance is primarily designed to protect against catastrophic events impacting multiple policies simultaneously.
Answer: False
The source states that Per Risk XL reinsurance typically includes event limits to prevent its use for widespread catastrophic events, which are primarily covered by Catastrophe XL reinsurance.
Aggregate XL reinsurance offers frequency protection, covering losses once a certain cumulative threshold of claims is reached over a period.
Answer: True
The source defines Aggregate XL reinsurance as providing frequency protection, covering losses once a cumulative threshold of claims is reached over a period.
Stop loss contracts are a specific type of Per Risk XL cover where limits are linked to gross premium income.
Answer: False
The source clarifies that stop loss contracts are a specific type of *Aggregate XL* cover, not Per Risk XL, where limits and deductibles are linked to gross premium income.
What is the key difference in liability between non-proportional and proportional reinsurance?
Answer: In non-proportional, the reinsurer only pays if total claims exceed a predetermined amount.
Which of the following is NOT a main form of non-proportional reinsurance?
Answer: Quota share
What are the three specific forms of 'excess of loss' reinsurance?
Answer: Per Risk XL, Per Occurrence XL, and Aggregate XL
What is 'Catastrophe XL' reinsurance specifically designed to protect against?
Answer: Catastrophic events that impact multiple policies simultaneously.
What kind of protection does 'Aggregate XL' reinsurance provide?
Answer: Frequency protection, covering losses once a certain cumulative threshold is reached.
How are 'stop loss' contracts related to Aggregate XL covers?
Answer: They are a specific type of Aggregate XL cover where limits are linked to gross premium income.
Under a 'risks attaching basis,' reinsurance covers claims from policies that began during the reinsurance contract period, valid for their entire duration.
Answer: True
The source defines 'risks attaching basis' as covering claims from policies that began during the reinsurance contract period, with coverage valid for the entire duration of those underlying policies.
A 'losses occurring basis' treaty covers all claims reported during the reinsurance contract period, regardless of when the loss event happened.
Answer: False
The source states that a 'losses occurring basis' treaty covers all claims that *happen* during the reinsurance contract period, not necessarily claims *reported* during that period, and regardless of when underlying policies started.
Assumption reinsurance involves the reinsurer completely replacing the ceding insurer and becoming directly legally responsible for policy claims.
Answer: True
The source defines assumption reinsurance as the reinsurer completely replacing the ceding insurer and becoming directly legally responsible for policy claims, requiring formal notice and release from policyholders.
Once a reinsurance contract is established, the reinsurer's liability typically ends when the reinsurance contract itself expires, regardless of the original policy's duration.
Answer: False
The source states that a reinsurer's liability usually extends for the *entire lifetime of the original insurance policy* it covers, ensuring continuous protection for the ceding company.
A 'continuous' reinsurance treaty has a predefined expiration date, unlike a 'term' agreement.
Answer: False
The source clarifies that a 'continuous' treaty has *no set end date* but can be canceled, whereas a 'term' agreement *has a predefined expiration date*.
Reinsurance contracts are highly standardized documents across the industry.
Answer: False
The source explicitly states that reinsurance contracts are *not standardized documents*, often being complex and distinct from direct insurance policies.
What does 'risks attaching basis' mean in reinsurance coverage?
Answer: Coverage for claims arising from policies that began during the reinsurance contract period, valid for their entire duration.
A reinsurance treaty on a 'losses occurring basis' covers:
Answer: All claims that happen during the period of the reinsurance contract, regardless of when underlying policies started.
What is a 'claims-made basis' policy in reinsurance?
Answer: It covers all claims that are reported to the primary insurer within the specified policy period.
What distinguishes 'assumption reinsurance' from other forms?
Answer: The reinsurer completely replaces the ceding insurer and becomes directly legally responsible for claims.
What is the typical duration of a reinsurer's liability for original insurance policies?
Answer: It extends for the entire lifetime of the original insurance policy it covers.
What is the distinction between a 'continuous' and a 'term' reinsurance treaty?
Answer: A continuous treaty has no set end date but can be canceled, while a term agreement has a predefined expiration date.
Fronting is an arrangement where an insurance company issues a policy and immediately transfers the risk to another company through reinsurance, often due to licensing issues.
Answer: True
The source defines fronting as an arrangement where a local insurer issues a policy and immediately transfers the risk to another company via reinsurance, often due to licensing or regulatory reasons.
A 'fronting insurer' bears no risk because the entire liability is immediately transferred to the reinsurer.
Answer: False
The source indicates that a 'fronting insurer' undertakes a *significant risk* because it remains legally obligated to pay claims even if the reinsurer becomes insolvent.
In reinsurance placements involving multiple reinsurers, the 'lead reinsurer' sets the terms and conditions.
Answer: True
The source explains that in multi-reinsurer placements, the 'lead reinsurer' is responsible for setting the terms and conditions for the reinsurance contract.
Retrocession is the process where a primary insurer directly cedes risk to multiple reinsurers.
Answer: False
The source defines retrocession as the transfer of risk *from a reinsurer* to other companies through a further reinsurance arrangement, not a primary insurer directly ceding to multiple reinsurers.
The 'Powers-Shubik rule' suggests that the optimal number of reinsurers should be approximately double the number of primary insurers in a market.
Answer: False
The source states that the 'Powers-Shubik rule' suggests the optimal number of active reinsurers should be approximately equal to the *square root* of the number of primary insurers, not double.
Ceding companies carefully select reinsurers because they are exchanging insurance risk for credit risk.
Answer: True
The source highlights that ceding companies meticulously select reinsurers because they are essentially exchanging insurance risk for credit risk, necessitating monitoring of financial ratings.
Reinsurers can indirectly influence society through a 'governance effect' by imposing underwriting and claims philosophies on primary carriers.
Answer: True
The source describes the 'governance effect' as the indirect influence reinsurers exert on society by imposing their underwriting and claims philosophies on primary carriers.
What is the practice known as 'fronting' in the reinsurance industry?
Answer: An arrangement where a local insurer issues a policy and immediately transfers the risk to another company via reinsurance.
What significant risk does a 'fronting insurer' undertake?
Answer: The risk of being legally obligated to pay claims even if the reinsurer becomes insolvent.
In reinsurance placements involving multiple reinsurers, what is the role of the 'lead reinsurer'?
Answer: To set the terms and conditions for the reinsurance contract.
What is 'retrocession'?
Answer: The transfer of risk from a reinsurer to other companies through a further reinsurance arrangement.
According to the 'Powers-Shubik rule,' what is the optimal number of active reinsurers in a national market?
Answer: Approximately equal to the square root of the number of primary insurers.
Why do ceding companies exercise great care in selecting their reinsurers?
Answer: Because they are exchanging insurance risk for credit risk.
How can reinsurers indirectly influence society?
Answer: Through the 'governance effect,' influencing primary carriers' underwriting and claims philosophies.