Alternatives to Traditional Reinsurance MCQs

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Alternatives to Traditional Reinsurance MCQs | Page 7 of 12

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Q61.
What is the main characteristic of a swap in derivative trading?

a.

It provides one-sided protection

b.

It locks in a price for a future transaction

c.

It exchanges risk under different terms

d.

It retains the right to opt out of the trade

Discuss
Answer: (c).It exchanges risk under different terms Explanation:In derivative trading, a swap is an agreement to exchange risk under different terms.
Q62.
What is an example of a swap?

a.

Exchanging earthquake exposure with windstorm exposure

b.

Locking in a price for a future trade

c.

Retaining the right to opt out of a trade

d.

Providing one-sided protection

Discuss
Answer: (a).Exchanging earthquake exposure with windstorm exposure Explanation:An example of a swap is when a Japanese reinsurer exchanges their earthquake exposure with windstorm exposure of a Swiss reinsurer.
Q63.
What is the purpose of derivatives in risk management?

a.

To bundle risks together

b.

To pass risks from parties unwilling to take risks to parties willing to take risks

c.

To create insurance contracts

d.

To protect against natural catastrophes

Discuss
Answer: (b).To pass risks from parties unwilling to take risks to parties willing to take risks Explanation:Derivatives in risk management allow for the unbundling of risks and the transfer of risks from parties not willing to take the risk to parties more willing to take the risks.
Q64.
Which exchange started trading insurance futures contracts following Hurricane Andrew?

a.

Chicago Mercantile Exchange (CME)

b.

New York Stock Exchange (NYSE)

c.

London Stock Exchange (LSE)

d.

Chicago Board of Trade (CBoT)

Discuss
Answer: (d).Chicago Board of Trade (CBoT) Explanation:The Chicago Board of Trade (CBoT) started trading insurance futures contracts following Hurricane Andrew.
Q65.
What is the main characteristic of a futures contract?

a.

It pays based on the price movements of an underlying asset or index

b.

It provides protection against weather-sensitive earnings

c.

It allows for the transfer of risks between parties

d.

It pays a fixed amount upon maturity

Discuss
Answer: (a).It pays based on the price movements of an underlying asset or index Explanation:A futures contract is a derivative that pays in relation to price movements of an underlying asset or level of an index.
Q66.
What is "basis risk" in the context of insurance derivatives?

a.

The difference between the buyer's individual loss ratio and the industry loss ratio

b.

The risk associated with natural catastrophes

c.

The risk of adverse weather conditions

d.

The risk of financial market volatility

Discuss
Answer: (a).The difference between the buyer's individual loss ratio and the industry loss ratio Explanation:In the context of insurance derivatives, "basis risk" refers to the difference between the buyer's individual loss ratio and the industry loss ratio used in the derivative transaction.
Q67.
In which sectors are weather derivatives particularly relevant?

a.

Agriculture, energy, and leisure

b.

Finance, technology, and healthcare

c.

Manufacturing, transportation, and real estate

d.

Education, government, and hospitality

Discuss
Answer: (a).Agriculture, energy, and leisure Explanation:Weather derivatives are particularly relevant in agriculture, energy, and leisure sectors where earnings are weather-sensitive.
Q68.
What is a benefit of "swap"-like situations for insurers and reinsurers?

a.

Premium income from two sources for the same peril

b.

Protection against natural catastrophes

c.

Reduced exposure to weather-sensitive earnings

d.

Guaranteed payments upon maturity

Discuss
Answer: (a).Premium income from two sources for the same peril Explanation:"Swap"-like situations in insurance and reinsurance allow insurers and reinsurers to look forward to premium income from two sources for the same peril, resulting in increased potential income.
Q69.
What is the main purpose of securitization in the insurance market?

a.

To remove credit risk for policyholders

b.

To increase coupon rates for investors

c.

To convert underlying assets into securities

d.

To overcome capacity constraints for natural catastrophe risks

Discuss
Answer: (d).To overcome capacity constraints for natural catastrophe risks Explanation:Securitization in the insurance market aims to overcome capacity constraints for natural catastrophe risks by securitizing catastrophe risk portfolios and placing them directly with investors in the form of securities.
Q70.
Why does securitization provide comfort to policyholders?

a.

It removes credit risk

b.

It increases coupon rates

c.

It converts assets into securities

d.

It provides higher capacities

Discuss
Answer: (a).It removes credit risk Explanation:Securitization provides comfort to policyholders by removing credit risk since the capital is made available before the loss occurs.
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