Alternatives to Traditional Reinsurance MCQs

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Alternatives to Traditional Reinsurance MCQs | Page 1 of 12

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Q1.
What is the purpose of alternative risk transfer in the insurance industry?

a.

To replace the regular insurance market

b.

To provide coverage for uninsurable business risks

c.

To eliminate the need for risk financing techniques

d.

To transform the role of insurance in risk management

Discuss
Answer: (b).To provide coverage for uninsurable business risks Explanation:Alternative risk transfer is not a replacement for the regular insurance market but rather a complementary approach to financing loss due to risk. It involves rethinking the role of insurance and expanding the range of risk financing techniques to cover previously uninsurable business risks, such as fluctuations in interest rates, foreign exchange rates, temperature fluctuations, and commodity prices. The goal is to develop customized solutions that combine coverage for event risks and financial risks.
Q2.
Which of the following is an example of alternative risk carriers?

a.

Self insurance

b.

Risk Retention Groups

c.

Pools

d.

All of the above

Discuss
Answer: (d).All of the above Explanation:Alternative risk transfer includes various types of alternative risk carriers. These include self insurance, risk retention groups, pools, and captives. Self insurance involves retaining a level of deductible and can be implemented through mutual groups or pools within an association or body. Risk Retention Groups are corporations owned and operated by insurance companies, formed to handle liability insurance for their members. Pools are cooperative arrangements where risks are shared among participating entities. Captives are insurance companies created by businesses to insure the risks of their parent company or affiliated entities.
Q3.
Which concept originated in the US with the passing of the Liability Risk Retention Act, 1981?

a.

Self insurance

b.

Risk Retention Groups

c.

Pools

d.

Captives

Discuss
Answer: (b).Risk Retention Groups Explanation:Risk Retention Groups (RRGs) originated in the US with the passing of the Liability Risk Retention Act in 1981. RRGs are corporations owned and operated by insurance companies that band together as self-insurers. They form an organization that is chartered and licensed as an insurer in at least one state to handle liability insurance. RRGs address gaps in liability coverage for their members, such as medical malpractice insurance.
Q4.
Which of the following is not a component of alternative risk transfer?

a.

Event risks

b.

Financial risks

c.

Traditional insurance policies

d.

Combination of event risks and financial risks

Discuss
Answer: (c).Traditional insurance policies Explanation:Alternative risk transfer involves a range of risk financing techniques beyond traditional insurance policies. It focuses on covering specific event risks and financial risks that may not be adequately addressed by standard insurance products. Traditional insurance policies, while an important part of the overall insurance market, are not considered a component of alternative risk transfer.
Q5.
What is the main purpose of a Risk Retention Group (RRG)?

a.

To provide traditional insurance coverage

b.

To share retained risks among group members

c.

To offer coverage for natural disasters

d.

To eliminate the need for risk financing techniques

Discuss
Answer: (b).To share retained risks among group members Explanation:A Risk Retention Group (RRG) is a specialized type of insurance organization. Its main purpose is to allow member insurance companies to share retained risks among themselves. RRGs are formed by insurance companies banding together as self-insurers to handle liability insurance. The primary objective is to provide coverage for specific risks that may not be readily available in the traditional insurance market.
Q6.
Which of the following is a globally recognized concept for alternative risk carriers?

a.

Self insurance

b.

Risk Retention Groups

c.

Pools

d.

Captives

Discuss
Answer: (d).Captives Explanation:Captives are a globally recognized concept for alternative risk carriers. Captives are insurance companies that are created by businesses to insure the risks of their parent company or affiliated entities. They offer a means for companies to retain risks within their own structure and gain more control over their insurance programs. Captives have been in existence since the 1950s and are used by organizations worldwide.
Q7.
Which approach to self insurance may not find legal and/or regulatory sanction in most countries?

a.

Retained level of deductible

b.

Mutual group or pool within an association

c.

Fund constituted to address a loss

d.

All approaches to self insurance find legal and regulatory sanction in most countries

Discuss
Answer: (c).Fund constituted to address a loss Explanation:While self insurance through a retained level of deductible and a mutual group or pool within an association are common approaches, a fund constituted to address a loss may not find legal and/or regulatory sanction in most countries. The establishment of a dedicated fund to cover potential losses is subject to varying legal and regulatory requirements and may not be permissible in certain jurisdictions.
Q8.
What is the primary purpose of a pool in alternative risk transfer?

a.

To provide coverage for natural disasters

b.

To aggregate insurance assets of individual companies

c.

To provide multiyear insurance coverage

d.

To insure risks solely for nuclear power stations

Discuss
Answer: (b).To aggregate insurance assets of individual companies Explanation:A pool in alternative risk transfer refers to a group of insurance companies that pool their assets together. The main purpose of a pool is to aggregate the insurance assets of individual companies, enabling them to provide a larger amount of insurance coverage than what could be provided by individual companies alone. Pools are commonly used for insuring large risks such as nuclear power stations.
Q9.
Which of the following is an example of an alternative carrier for the risk of terrorism in the UK?

a.

Market Terrorism Pool

b.

Pool Re

c.

U.K. Treasury

d.

Captive

Discuss
Answer: (b).Pool Re Explanation:Pool Re is an example of an alternative carrier for the risk of terrorism in the UK. It is a specialized insurance organization that covers all risks, including nuclear and biological contamination, aircraft impact, and flooding caused by terrorist attacks. Pool Re is supported by the U.K. Treasury as the reinsurer of last resort, providing additional financial protection in case Pool Re exhausts its resources.
Q10.
What is the key characteristic of a captive in alternative risk transfer?

a.

It provides coverage for multiple lines of insurance

b.

It is custom-tailored to the unique needs of the client

c.

It aggregates and insures only the risks of its sponsors

d.

It offers coverage triggered by multiple factors

Discuss
Answer: (c).It aggregates and insures only the risks of its sponsors Explanation:A captive in alternative risk transfer is an insurer that is created and wholly owned by its sponsors, typically businesses or organizations. The primary characteristic of a captive is that it aggregates and insures only the risks of its sponsors, allowing them to have more control over their insurance programs. Captives are customized to the specific needs of the sponsoring entity and find legal and regulatory sanction in most countries.
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