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 4 of 12

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Q31.
What is the characteristic of premium payments in a Finite Risk program?

a.

Premiums are fixed for the entire policy duration

b.

Premiums are based on the insurer's experience

c.

Premiums are paid at the end of the policy period

d.

Premiums are returnable to the policyholder if no losses occur

Discuss
Answer: (d).Premiums are returnable to the policyholder if no losses occur Explanation:If a Finite Risk program runs loss-free during its multi-year term, the premiums paid by the policyholder are returnable with interest at the agreed rate for that period. This means that if no losses occur, the policyholder can receive a refund of the premiums.
Q32.
How are finite risk solutions typically written?

a.

By multiple reinsurers sharing the risk

b.

By pooling assets of multiple insurers

c.

By a single reinsurer

d.

By involving capital markets

Discuss
Answer: (c).By a single reinsurer Explanation:Finite Risk programs are usually written by a single reinsurer. This means that a single reinsurer takes on the risk associated with the program.
Q33.
What is the role of investment income in premium calculation for Finite Risk programs?

a.

Investment income is factored into the premium calculation

b.

Investment income is returned to the policyholder

c.

Investment income is used to pay claims

d.

Investment income has no impact on premium calculation

Discuss
Answer: (a).Investment income is factored into the premium calculation Explanation:Investment income earned on premium funds credited during the policy period is factored directly into the premium calculation for Finite Risk programs. This means that the investment income influences the premium amount.
Q34.
What is the concern raised by critics regarding finite risk or nontraditional insurance products?

a.

Lack of regulatory scrutiny

b.

Insufficient risk transfer

c.

Excessive disclosure requirements

d.

Inadequate accounting standards

Discuss
Answer: (b).Insufficient risk transfer Explanation:Critics of finite risk or nontraditional insurance products have expressed concerns that these products may be more similar to loans rather than true risk transfer products. They argue that there is insufficient risk transfer in these transactions.
Q35.
What is the requirement for a reinsurance contract to be considered as reinsurance for accounting purposes?

a.

It must involve a complete transfer of risk to the reinsurer

b.

It must meet specific regulatory scrutiny

c.

It must have a high probability of loss

d.

It must transfer a certain percentage of risk to the reinsurer

Discuss
Answer: (d).It must transfer a certain percentage of risk to the reinsurer Explanation:To be considered reinsurance for accounting purposes, a reinsurance contract must involve some transfer of risk to the reinsurer. It does not require a complete transfer of risk but rather a certain percentage of risk transfer.
Q36.
What is the "10-10 rule" regarding risk transfer?

a.

A rule for regulatory scrutiny of nontraditional insurance products

b.

A rule for determining premium rates in reinsurance contracts

c.

A rule for assessing the probability of loss in risk transfer

d.

A rule for calculating the amount of risk involved in financing mechanisms

Discuss
Answer: (c).A rule for assessing the probability of loss in risk transfer Explanation:The "10-10 rule" is a well-established rule of thumb used to assess whether true risk transfer has occurred. It states that there should be a 10 percent probability of a 10 percent loss of premium to consider it as a true risk transfer.
Q37.
What is the primary objective of financial reinsurance?

a.

To maximize profits

b.

To minimize losses

c.

To equalize risk over time

d.

To increase solvency margin

Discuss
Answer: (c).To equalize risk over time Explanation:The primary objective of financial reinsurance is to strive for risk equalization over time and stabilize the ceding insurer's balance sheet.
Q38.
How is financial reinsurance different from finite reinsurance?

a.

Financial reinsurance involves significant underwriting and timing risk transfer.

b.

Financial reinsurance involves financial risk transfer but no underwriting and timing risk transfer.

c.

Financial reinsurance does not involve any risk transfer.

d.

Financial reinsurance and finite reinsurance are the same.

Discuss
Answer: (b).Financial reinsurance involves financial risk transfer but no underwriting and timing risk transfer. Explanation:Financial reinsurance is distinguished from finite reinsurance by either not having a sufficiently significant amount of underwriting and timing risk transfer (option i) or not having underwriting and timing risk transfer but involving financial risk transfer (option ii).
Q39.
What does the ceding insurer receive in financial reinsurance?

a.

Premiums from the reinsurer

b.

Policy reserves from the reinsurer

c.

Ceding commissions from the reinsurer

d.

Capital and subordinated loan from the reinsurer

Discuss
Answer: (c).Ceding commissions from the reinsurer Explanation:In financial reinsurance, the ceding insurer receives ceding commissions from the reinsurer.
Q40.
How is the amount of ceding commission determined in financial reinsurance?

a.

Based on the reinsurer's expected business profit

b.

Based on the reinsurer's present value

c.

Based on technical basis, investment yields, and business expenses

d.

Based on the reinsurer's new business expenses

Discuss
Answer: (c).Based on technical basis, investment yields, and business expenses Explanation:The amount of ceding commission in financial reinsurance is estimated on technical basis, investment yields, business expenses, etc., and is finally decided by the ceding insurer and the reinsurer based on the insurer's expected business profit, present value, and new business expenses.
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