Alternatives to Traditional Reinsurance MCQs

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Alternatives to Traditional Reinsurance MCQs | Page 5 of 12

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Q41.
What does the ceding insurer appropriate the ceding commission for in financial reinsurance?

a.

Repayment of loans to the reinsurer

b.

Investment in new business ventures

c.

Payment of policy reserves

d.

Strengthening of financial position

Discuss
Answer: (a).Repayment of loans to the reinsurer Explanation:In financial reinsurance, the ceding insurer appropriates the ceding commission from the reinsurer for loans.
Q42.
What type of risk transfer is involved in financial reinsurance?

a.

Underwriting and timing risk transfer

b.

Financial risk transfer

c.

Both underwriting and financial risk transfer

d.

No risk transfer is involved

Discuss
Answer: (b).Financial risk transfer Explanation:Financial reinsurance involves financial risk transfer but may not involve significant underwriting and timing risk transfer.
Q43.
Where is financial reinsurance often used as a means to increase solvency margin?

a.

Europe and the United States

b.

Asia and Africa

c.

Australia and New Zealand

d.

South America and Canada

Discuss
Answer: (a).Europe and the United States Explanation:Financial reinsurance is often used as a major means to increase solvency margin like capital and subordinated loan in Europe and the United States.
Q44.
What are the charges included in the risks covered by financial reinsurance?

a.

Interest on ceding commission

b.

Business expenses

c.

Fees for hedging exchange risk

d.

All of the above

Discuss
Answer: (d).All of the above Explanation:Charges for risks in financial reinsurance include interest on ceding commission, business expenses, and fees for hedging exchange risk.
Q45.
What does the ceding commission contribute to in financial reinsurance?

a.

Augmentation of provision for policy reserves

b.

Increase in investment earnings

c.

Reduction of solvency margin

d.

Stabilization of yearly revenues only

Discuss
Answer: (a).Augmentation of provision for policy reserves Explanation:The amount of ceding commission in financial reinsurance is appropriated to augment provision for policy reserves and contributes to an increase in solvency margin.
Q46.
When is financial reinsurance considered a useful tool?

a.

When investment earnings are high

b.

When there is a substantial decrease in new business

c.

When there are situational changes in the investment climate

d.

When yearly revenues and expenses are unstable

Discuss
Answer: (c).When there are situational changes in the investment climate Explanation:Financial reinsurance is considered a useful tool in situations where earnings from investment are considerably reduced due to situational changes in the investment climate, or to get over a tentative financial strain, or to stabilize yearly revenues and expenses.
Q47.
How long does a financial reinsurance contract typically last?

a.

1 to 3 years

b.

3 to 5 years

c.

5 to 7 years

d.

7 to 10 years

Discuss
Answer: (c).5 to 7 years Explanation:The financial reinsurance contract is terminated when the ceding commission paid in the first year is redeemed ordinarily in five to seven years.
Q48.
Besides increasing the fund and capital, what other means of strengthening owned capital do insurance companies often use with the approval of the Regulator?

a.

Financial reinsurance

b.

Subordinated loan

c.

Time and distance policies

d.

Spread loss and loss portfolio transfers

Discuss
Answer: (b).Subordinated loan Explanation:In many countries, in addition to an increase in the fund and capital, insurance companies accept subordinated loan and financial reinsurance as a means of strengthening owned capital with the approval of the Regulator.
Q49.
Which of the following is NOT a variant of financial reinsurance?

a.

Time and distance policies

b.

Spread loss

c.

Loss portfolio transfers

d.

Finite reinsurance

Discuss
Answer: (d).Finite reinsurance Explanation:Finite reinsurance is not a variant of financial reinsurance. The variants of financial reinsurance are time and distance policies, spread loss, and loss portfolio transfers.
Q50.
What is the purpose of a "time and distance" policy in reinsurance?

a.

To reinsure long-tailed claims

b.

To comply with liquidity regulations

c.

To obtain higher returns on funds

d.

All of the above

Discuss
Answer: (d).All of the above Explanation:A "time and distance" policy in reinsurance allows syndicates at Lloyd's to reinsure their long-tailed claims, comply with liquidity regulations, and obtain higher returns on their funds.
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