Alternatives to Traditional Reinsurance MCQs

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Alternatives to Traditional Reinsurance MCQs | Page 11 of 12

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Q101.
Which of the following is considered an alternative risk transfer method?

a.

Self-insurance, Risk Retention Groups, Pools, and Captives.

b.

Asset management and investment strategies.

c.

Derivative securities and financial instruments.

d.

Traditional insurance and reinsurance policies.

Discuss
Answer: (a).Self-insurance, Risk Retention Groups, Pools, and Captives. Explanation:Alternative risk transfer includes alternative types of risk carriers such as self-insurance, risk retention groups, pools, and captives.
Q102.
What is the objective of risk transfer?

a.

Minimize the total cost of capital needed for risk management.

b.

Maximize profits through high-risk investments.

c.

Achieve regulatory compliance in the insurance industry.

d.

Provide comprehensive coverage for all types of risks.

Discuss
Answer: (a).Minimize the total cost of capital needed for risk management. Explanation:The objective of risk transfer is to enable a customer to minimize the total cost of capital needed to deal with a risk by reinsuring.
Q103.
What does asset management refer to?

a.

Managing tangible assets such as buildings and machinery.

b.

Monitoring and optimizing investment portfolios.

c.

Assessing liability risks and implementing risk mitigation strategies.

d.

Evaluating the financial performance of insurance companies.

Discuss
Answer: (b).Monitoring and optimizing investment portfolios. Explanation:Asset management refers to the professional management of investments such as stocks and bonds along with real estate, setting realistic goals to increase the insurer's/reinsurer's wealth and measuring performance.
Q104.
What is the purpose of risk retention financing?

a.

Provide insurance coverage for high-risk individuals.

b.

Assist insurers and corporates in financing their retention.

c.

Transfer risks to external parties through reinsurance contracts.

d.

Enhance regulatory compliance for insurance companies.

Discuss
Answer: (b).Assist insurers and corporates in financing their retention. Explanation:In risk retention financing, there is potential to assist insurers and corporates in financing their retention.
Q105.
What are derivative securities?

a.

Insurance policies that cover specific risks.

b.

Financial instruments whose value depends on underlying assets.

c.

Bonds issued by captive insurance companies.

d.

Securities backed by collateralized debt obligations.

Discuss
Answer: (b).Financial instruments whose value depends on underlying assets. Explanation:Derivative securities are financial securities whose value depends upon primary valuables such as stock prices, exchange rates, and interest rates.
Q106.
How do derivatives contribute to risk management?

a.

They transfer risks to external parties through reinsurance contracts.

b.

They provide comprehensive coverage for all types of risks.

c.

They unbundle risks and allow parties to customize risk exposure.

d.

They enhance regulatory compliance for insurance companies.

Discuss
Answer: (c).They unbundle risks and allow parties to customize risk exposure. Explanation:Derivatives unbundle risks and pass the risks from parties not willing to take the risk to parties more willing to take the risks.
Q107.
What is the purpose of securitization in the insurance market?

a.

To transfer risks to external parties through reinsurance contracts.

b.

To provide comprehensive coverage for all types of risks.

c.

To enhance regulatory compliance for insurance companies.

d.

To convert insurance risks into tradable securities.

Discuss
Answer: (d).To convert insurance risks into tradable securities. Explanation:Securitization is an attempt to get over capacity constraints in the insurance market for natural catastrophes by securitizing catastrophe risk portfolios and placing them directly with investors in the form of securities.
Q108.
What does securitization allow issuers to do?

a.

Issue insurance policies to cover specific risks.

b.

Convert their underlying assets into securities or pass through certificates (PTCs).

c.

Access reinsurance capacity for high-risk exposures.

d.

Facilitate risk transfer through alternative risk transfer methods.

Discuss
Answer: (b).Convert their underlying assets into securities or pass through certificates (PTCs). Explanation:Securitization allows issuers to convert their underlying assets into securities or pass through certificates (PTCs).
Q109.
What does Alternative Risk Transfer (ART) encompass?

a.

Traditional insurance and reinsurance policies.

b.

Risk management strategies focused on avoiding risks.

c.

Captive insurance and self-insurance techniques.

d.

Financial planning and investment management.

Discuss
Answer: (c).Captive insurance and self-insurance techniques. Explanation:Alternative Risk Transfer is a broad term that embraces a wide range of risk management products that fall outside the traditional insurance and reinsurance markets.
Q110.
What is driving the increased demand for ART products?

a.

Higher reinsurance prices driven primarily by a shortage of capacity in the retrocession market.

b.

Increased fluctuations in the financial market.

c.

Exploitation of tax and regulatory asymmetries.

d.

Providing multi-year covers through securitization of risk and derivatives.

Discuss
Answer: (a).Higher reinsurance prices driven primarily by a shortage of capacity in the retrocession market. Explanation:Higher reinsurance prices driven primarily by a shortage of capacity in the retrocession market - the reinsurance of reinsurance - are being reflected in increased demand for ART products.
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