Alternatives to Traditional Reinsurance MCQs

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Alternatives to Traditional Reinsurance MCQs | Page 2 of 12

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Q11.
Which feature is common to all alternative risk transfer products?

a.

Custom-tailored coverage

b.

Multiyear insurance basis

c.

Applicability to multiple lines of coverage

d.

Triggered by a single event

Discuss
Answer: (a).Custom-tailored coverage Explanation:One of the common features of all alternative risk transfer products is that they are custom-tailored to the unique needs of the client. Unlike standard insurance policies, alternative risk transfer products are designed to address specific risks and coverage requirements of the client. This customization allows for a more tailored and flexible approach to risk financing.
Q12.
What sparked the movement towards alternative risk solutions?

a.

Corporate customers' need to maximize return on shareholder funds

b.

Increased understanding and grasp of risk financing techniques

c.

The evaluation of total cost of risk financing

d.

The inclusion of uninsurable risks with alternative risk techniques

Discuss
Answer: (b).Increased understanding and grasp of risk financing techniques Explanation:The movement towards alternative risk solutions was sparked by corporate customers who developed a greater understanding and grasp of risk financing techniques as a corporate strategy. As they became more sophisticated in using capital markets, their need to maximize return on shareholder funds and evaluate the total cost of risk financing led them to explore alternative approaches beyond traditional insurance.
Q13.
Why did corporate customers evaluate the total cost of risk financing?

a.

To eliminate expenses and profits of an insurer

b.

To include uninsurable risks with alternative risk techniques

c.

To understand the logic in buying insurance from a smaller insurer

d.

To maximize return on shareholder funds

Discuss
Answer: (a).To eliminate expenses and profits of an insurer Explanation:Corporate customers evaluated the total cost of risk financing to determine the most cost-effective approach. By eliminating the expenses and profits associated with traditional insurance, they sought to optimize the allocation of their funds and reduce unnecessary expenditures. This evaluation was part of their broader understanding and grasp of risk financing techniques.
Q14.
When do alternative market products become relatively attractive to insurance buyers?

a.

During years of declining premiums and flexible underwriting

b.

During years of rising premiums and strict underwriting

c.

When the traditional insurance market hardens

d.

When the cost of traditional insurance and reinsurance is low

Discuss
Answer: (b).During years of rising premiums and strict underwriting Explanation:Alternative market products become relatively attractive to insurance buyers during years of rising premiums and strict underwriting. In the traditional insurance market, premium cycles often include periods of declining premiums and flexible underwriting followed by periods of rising premiums and stricter underwriting. When premiums are high and the traditional market hardens, buyers seek alternatives that offer more favorable terms and pricing, making alternative market products a viable substitute for traditional insurance.
Q15.
Which of the following is not a technique of risk management?

a.

Risk Transfer

b.

Risk Avoidance

c.

Risk Retention Financing

d.

Asset Management

Discuss
Answer: (b).Risk Avoidance Explanation:Risk avoidance is not one of the techniques of risk management. Risk management techniques are risk transfer, risk retention financing, and asset management.
Q16.
What is the objective of risk transfer?

a.

To minimize the total cost of capital needed to deal with a risk

b.

To avoid any potential risks

c.

To maximize profits through equity capital

d.

To invest in various assets for risk diversification

Discuss
Answer: (a).To minimize the total cost of capital needed to deal with a risk 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 the risk, the customer can reduce the amount of capital required to cover potential losses. This approach can be more advantageous than relying solely on equity capital, especially for large corporates and insurers.
Q17.
What is a classic field of activity for reinsurers in the risk retention financing approach?

a.

Finite reinsurance

b.

Run-off covers

c.

Debt financing

d.

Hybrid and equity tools

Discuss
Answer: (a).Finite reinsurance Explanation:Risk retention financing involves assisting insurers and corporates in financing their retention. A classic field of activity for reinsurers in this approach is finite reinsurance. Finite reinsurance involves structuring reinsurance contracts with specific terms and limits to provide financial support for the retained risk.
Q18.
What has led to considerable expansion in the number of different products available for risk retention financing?

a.

Liberalization and innovative power of the capital markets

b.

Fluctuations in the financial markets

c.

The cycles of hard and soft markets in reinsurance and insurance business

d.

Growth in the corporate financing behavior

Discuss
Answer: (a).Liberalization and innovative power of the capital markets Explanation:In recent years, liberalization and the resultant innovative power of the capital markets have led to considerable expansion in the number of different products available for risk retention financing. This has opened up new avenues for insurers and corporates to manage and finance their retained risks using debt, hybrid instruments, equity tools, and other market-based solutions.
Q19.
What is the role of asset management in risk transfer and risk retention financing?

a.

It involves bundling several lines of traditional risks

b.

It sets realistic goals for insurer's/reinsurer's wealth growth

c.

It measures the performance of insurance policies

d.

It focuses on the management of investment assets

Discuss
Answer: (d).It focuses on the management of investment assets Explanation:Asset management refers to the professional management of investments such as stocks, bonds, real estate, etc. It plays a central role in risk transfer and risk retention financing by focusing on effectively managing the insurer's or reinsurer's investment assets to achieve growth and measure performance.
Q20.
What is the significance of investment income in the premium calculation?

a.

It determines the coverage limits and deductibles

b.

It influences the time value of money in premium calculations

c.

It determines the pricing of individual risk exposures

d.

It factors in the anticipated investment income as a separate premium component

Discuss
Answer: (b).It influences the time value of money in premium calculations Explanation:Investment income earned during the policy period can have a considerable influence on premium calculations. The time value of money, which includes investment income, is factored into the premium calculation. This is particularly relevant in multiyear finite-risk policies, where the anticipated investment income is acknowledged as an underwriting component.
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