Alternatives to Traditional Reinsurance MCQs

Welcome to our comprehensive collection of Multiple Choice Questions (MCQs) on Alternatives to Traditional Reinsurance, a fundamental topic in the field of IC85 Reinsurance Management. Whether you're preparing for competitive exams, honing your problem-solving skills, or simply looking to enhance your abilities in this field, our Alternatives to Traditional Reinsurance MCQs are designed to help you grasp the core concepts and excel in solving problems.

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Alternatives to Traditional Reinsurance MCQs | Page 3 of 12

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Q21.
What is the concept of a multi-line/multi-year package in reinsurance?

a.

Bundling traditional risks with uninsurable risks

b.

Aggregating liability limits and deductibles across all coverages

c.

Setting individual limits and deductibles for each year

d.

Designing packages as part of Enterprise-wide Risk Management

Discuss
Answer: (b).Aggregating liability limits and deductibles across all coverages Explanation:A multi-line/multi-year package in reinsurance involves bundling several lines of traditional risks and combining them with special or uninsurable risks. In this approach, the liability limits and deductibles are aggregated across all coverages and risk exposures, rather than being set individually. Such packages are designed to spread risk over time and may also be part of an Enterprise-wide Risk Management strategy.
Q22.
What are the benefits of a multi-line/multi-year package in reinsurance?

a.

Diversification over time with balanced years

b.

Customized risk package without any coverage gaps

c.

Reduced negotiation and administration costs

d.

All of the above

Discuss
Answer: (d).All of the above Explanation:There are several benefits of a multi-line/multi-year package in reinsurance. These include diversification over time with balanced years, a customized risk package that avoids coverage gaps, and reduced negotiation and administration costs.
Q23.
What is the key feature of a multi-trigger cover in insurance?

a.

It requires more than one triggering event for coverage

b.

It provides coverage for losses caused by multiple perils

c.

It allows for lower premium rates for insurers

d.

It adjusts financial losses based on agreed commodity price movements

Discuss
Answer: (a).It requires more than one triggering event for coverage Explanation:A multi-trigger cover requires more than one triggering event for coverage. In traditional insurance policies, coverage is typically triggered by a single event caused by an insured peril. However, multi-trigger covers involve multiple triggering events, which can help reduce the probability of loss payment and potentially result in lower premium rates for insurers.
Q24.
What is an example of a double-trigger policy?

a.

Losses caused by power outage and high commodity prices

b.

Losses caused by fire and storm-related damage

c.

Losses caused by equipment failure and power outage

d.

Losses caused by storm-related damage and high commodity prices

Discuss
Answer: (a).Losses caused by power outage and high commodity prices Explanation:An example of a double-trigger policy, which pays for actual losses of a manufacturer caused by two simultaneous events: a power outage resulting from equipment failure or storm-related damage, and the spot market price for power exceeding a preset threshold during the storm or equipment-related failure.
Q25.
What is the advantage of a multi-trigger cover for insurers?

a.

It provides coverage for a wider range of perils

b.

It allows for higher premium rates

c.

It reduces the probability of loss payment

d.

It simplifies the claims adjustment process

Discuss
Answer: (c).It reduces the probability of loss payment Explanation:From an insurer's viewpoint, a multi-trigger cover reduces the probability of a loss payment. This is because the occurrence of multiple triggering events is required for claims to be paid. This reduced probability can potentially lead to lower premium rates for insurers.
Q26.
What is the purpose of contingent capital in risk management?

a.

To transfer risk before the occurrence of a loss event

b.

To finance a loss after the occurrence of a major loss event

c.

To provide liquidity in times of crisis

d.

To comply with solvency margins for direct insurers

Discuss
Answer: (b).To finance a loss after the occurrence of a major loss event Explanation:Contingent capital is a way to finance a loss after the event has occurred, particularly in cases where a major loss causes a crisis of liquidity and raising fresh capital becomes expensive or impossible.
Q27.
How does contingent capital function in risk financing?

a.

It acts as a loan agreement with a bank for raising capital

b.

It guarantees the right to raise equity or loan capital after an insurance event

c.

It provides insurance coverage against rare but severe loss events

d.

It complies with solvency margins for direct insurers

Discuss
Answer: (b).It guarantees the right to raise equity or loan capital after an insurance event Explanation:Contingent capital in its simplest form is similar to a loan agreement with a bank, but with the condition that the policyholder has the right to raise equity or loan capital at agreed terms if a contractually defined insurance event occurs. This ensures that capital can be raised after the event to sustain business operations.
Q28.
What is a variant to the assurance of contingent capital?

a.

Purchase of a put option

b.

Purchase of equity shares

c.

Issuance of bonds

d.

Creation of a risk retention group

Discuss
Answer: (a).Purchase of a put option Explanation:A variant to the assurance of contingent capital is the purchase of a put option. It explains that if a pre-specified insurance loss occurs and the share price falls below a predefined level, the assured insurer can exercise the put option and raise additional capital at the agreed price.
Q29.
Why are contingent capital solutions popular with direct insurers?

a.

To transfer risk before the occurrence of a loss event

b.

To comply with solvency margins and regulations

c.

To provide liquidity in times of crisis

d.

To hedge against extremely rare but severe loss events

Discuss
Answer: (b).To comply with solvency margins and regulations Explanation:Contingent capital solutions have been popular with direct insurers primarily to help comply with solvency margins and be able to write business after a major loss event.
Q30.
What is the main idea behind a Finite Risk program?

a.

To provide unlimited risk coverage to insurers

b.

To limit the liability of insurers or reinsurers

c.

To transfer risk completely to policyholders

d.

To offer multi-year coverage with no limits

Discuss
Answer: (b).To limit the liability of insurers or reinsurers Explanation:The fundamental approach in a Finite Risk program is to have an ultimate limit of liability to the insurer or reinsurer, referred to as the "provider." This limitation sets a cap on the exposure that can be covered, providing a means to limit the liability.
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