Forms of Reinsurance MCQs

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Forms of Reinsurance MCQs | Page 2 of 6

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Q11.
Why do insurers obtain reinsurance coverage before accepting to insure a client in facultative reinsurance?

a.

To ensure that the reinsurance terms exceed those applying to the direct insurance

b.

To reduce the liability to treaty reinsurers on certain risks

c.

To provide extra capacity

d.

To back up the judgment of the original underwriter at the insurer's office

Discuss
Answer: (d).To back up the judgment of the original underwriter at the insurer's office Explanation:Insurers obtain reinsurance coverage before accepting to insure a client in facultative reinsurance "to back up the judgment of the original underwriter at the insurer's office who will often benefit from the reinsurer's knowledge of a particular risk or class of risk."
Q12.
What is the main reason for the decline of facultative reinsurance over time?

a.

High administrative costs

b.

Limited flexibility

c.

Ineffective risk management

d.

Unpopularity among reinsurers

Discuss
Answer: (a).High administrative costs Explanation:The main reason for the decline of facultative reinsurance over time is "high administrative costs."
Q13.
What is the advantage of using facultative reinsurance to reinsure hazardous risks not protected by treaty arrangements?

a.

It reduces the liability to treaty reinsurers on certain risks

b.

It reduces the insurer's liability in a certain area

c.

It provides extra capacity

d.

It assists insurers to fill voids in coverage created by reinsurance treaty exclusions

Discuss
Answer: (d).It assists insurers to fill voids in coverage created by reinsurance treaty exclusions Explanation:The advantage of using facultative reinsurance to reinsure hazardous risks not protected by treaty arrangements is that it "assists insurers to fill voids in coverage created by reinsurance treaty exclusions by negotiating a separate facultative reinsurance contract for a particular policy or group of policies."
Q14.
What is facultative reinsurance?

a.

Reinsurance for a defined group of policies

b.

Reinsurance for a single policy

c.

Reinsurance for all policies of an insurer

d.

Reinsurance for a specific type of policy

Discuss
Answer: (b).Reinsurance for a single policy Explanation:Facultative reinsurance is a method of reinsuring risks on an individual basis where the insurer has no obligation to cede a risk from an original insured and the reinsurer has the option of accepting or declining each proposal.
Q15.
What is the main advantage of facultative reinsurance?

a.

Lower administrative costs

b.

Flexibility to reinsure hazardous risks not protected by treaty arrangements

c.

Greater capacity to reinsure multiple risks

d.

Provides coverage for all policies of an insurer

Discuss
Answer: (b).Flexibility to reinsure hazardous risks not protected by treaty arrangements Explanation:The main advantage of facultative reinsurance is its flexibility, which has resulted in its strategic and widespread use to reinsure hazardous risks not protected by treaty arrangements.
Q16.
What are the limitations of facultative reinsurance?

a.

Requires less skilled personnel for underwriting individual risks

b.

Involves less administrative work as each offer has to be scrutinized

c.

Requires the reinsurer to have the necessary personnel with knowledge and capability to underwrite each exposure accurately

d.

Cannot be used to reduce the liability to treaty reinsurers on certain risks

Discuss
Answer: (c).Requires the reinsurer to have the necessary personnel with knowledge and capability to underwrite each exposure accurately Explanation:The limitations of facultative reinsurance are that it requires the use of skilled personnel and technical resources for underwriting individual risks, and involves more administrative work as each offer has to be scrutinized and separate data maintained for retention, limits, rates, and reinsurer/s involved for each facultative placement.
Q17.
What are the considerations for a single Mega Risk Facultative Reinsurance Placement?

a.

Policy Limits and Retention

b.

Risk Inspection

c.

Underwriting Criteria

d.

All of the above

Discuss
Answer: (b).Risk Inspection Explanation:A typical checklist of considerations for a single Mega Risk Facultative Reinsurance Placement includes Risk Inspection, PML Assessment, Composite Brokers Intervention, Valuation, Tender Process, Co-insurance, Reinsurers with superior credit rating, Determination of Deductible Time Excess/Other Terms, Rate Net of Commission, Route Survey for Movement of Critical Machineries, Project Monitoring for Delays, and Claims Control Clause-establishing communication system & procedures for preliminary loss intimation/survey/technical support.
Q18.
Which of the following is correct with respect to facultative reinsurance?

a.

Ceding insurer does not have the option to cede in facultative reinsurance

b.

Ceding reinsurer has the option to cede in a facultative reinsurance

c.

Reinsurer does not have the option to accept facultative reinsurance

d.

Reinsurer does not have the option to decline risk of insurance company

Discuss
Answer: (b).Ceding reinsurer has the option to cede in a facultative reinsurance Explanation:Facultative reinsurance is a type of reinsurance contract where the ceding insurer has the option to cede and the reinsurer has the option to accept or decline a specific risk of a specific insured. So, option b is correct. Option a is incorrect because the ceding insurer has the option to cede in facultative reinsurance. Option c is incorrect because the reinsurer has the option to accept or decline facultative reinsurance. Option d is incorrect because the reinsurer has the option to decline the risk of the insurance company in facultative reinsurance.
Q19.
What is treaty reinsurance?

a.

An agreement between the original insurer and reinsurer for a specific risk

b.

A contract where the reinsurer has the option to accept or decline risks

c.

An agreement between the original insurer and reinsurer where the reinsurer automatically accepts a certain liability for all risks

d.

An agreement between the original insurer and reinsurer for a single policy

Discuss
Answer: (c).An agreement between the original insurer and reinsurer where the reinsurer automatically accepts a certain liability for all risks Explanation:Treaty reinsurance is an agreement between the original insurer and reinsurer where the reinsurer automatically accepts a certain liability for all risks falling within the scope of the agreement.
Q20.
What are the two ways in which treaty reinsurance may be transacted?

a.

Proportional and non-proportional basis

b.

Proportional and facultative basis

c.

Non-proportional and facultative basis

d.

Non-proportional and exclusive basis

Discuss
Answer: (a).Proportional and non-proportional basis Explanation:Treaty reinsurance may be transacted on a proportional or non-proportional basis.
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