Forms of Reinsurance MCQs

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Forms of Reinsurance MCQs | Page 3 of 6

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Q21.
What is the key difference between facultative and treaty reinsurance?Why are the administrative costs lower in treaty reinsurance than in facultative reinsurance?

a.

Treaty reinsurance is a contract where the reinsurer has the option to accept or decline risksTreaty reinsurance provides automatic cover

b.

Facultative reinsurance provides automatic cover for all risksTreaty reinsurance requires review of individual risks by the reinsurer

c.

Treaty reinsurance automatically accepts all risks falling within the scope of the agreementFacultative reinsurance guarantees a definite amount of reinsurance protection on every risk which the insurer accepts

d.

Treaty reinsurance only covers a specific risk or policyTreaty reinsurance does not require a careful review of the underwriting philosophy

Discuss
Answer: (b).Treaty reinsurance automatically accepts all risks falling within the scope of the agreementTreaty reinsurance provides automatic cover Explanation:The key difference between facultative and treaty reinsurance is that treaty reinsurance automatically accepts all risks falling within the scope of the agreement, while facultative reinsurance provides cover for specific risks.The administrative costs are lower in treaty reinsurance because treaty reinsurance provides automatic cover.
Q22.
What is the key difference between facultative and treaty reinsurance?

a.

Treaty reinsurance is a contract where the reinsurer has the option to accept or decline risks

b.

Facultative reinsurance provides automatic cover for all risks

c.

Treaty reinsurance automatically accepts all risks falling within the scope of the agreement

d.

Treaty reinsurance only covers a specific risk or policy

Discuss
Answer: (c).Treaty reinsurance automatically accepts all risks falling within the scope of the agreement Explanation:The key difference between facultative and treaty reinsurance is that treaty reinsurance automatically accepts all risks falling within the scope of the agreement, while facultative reinsurance provides cover for specific risks.
Q23.
What is a formal treaty wording?

a.

The agreement between the original insurer and reinsurer for a single risk

b.

The document that describes the monetary limits and mode of operation, the classes of business covered, the territorial scope, the risks excluded, the calculation and payment of claims, the calculation and payment of premiums and the period of agreement

c.

The document that describes the reinsurer's right to decline risks

d.

The document that describes the insurer's obligation to accept all risks

Discuss
Answer: (b).The document that describes the monetary limits and mode of operation, the classes of business covered, the territorial scope, the risks excluded, the calculation and payment of claims, the calculation and payment of premiums and the period of agreement Explanation:A formal treaty wording is usually drawn up by the parties to describe the monetary limits and mode of operation, the classes of business covered, the territorial scope, the risks excluded, the calculation and payment of claims, the calculation and payment of premiums and the period of agreement.
Q24.
Which of the following is not a characteristic of treaty reinsurance?

a.

Automatic acceptance of liability by the reinsurer

b.

Foregoing of certain rights by both parties

c.

Lower administrative costs than facultative reinsurance

d.

Review of individual risks by the reinsurer

Discuss
Answer: (d).Review of individual risks by the reinsurer Explanation:While treaty reinsurance does not require a review of individual risks by the reinsurer, it does require a careful review of the underwriting philosophy, practice, historical experience of the ceding insurer, as well as the management's general background, expertise, and planned objectives.
Q25.
Which of the following is typically described in a formal treaty wording for treaty reinsurance?

a.

The types of risks excluded

b.

The reinsurer's right to decline risks

c.

The insurer's obligation to allow all risks within the scope to be covered

d.

The monetary limits and mode of operation

Discuss
Answer: (d).The monetary limits and mode of operation Explanation:A formal treaty wording is drawn up by the parties to describe the monetary limits and mode of operation, the classes of business covered, the territorial scope, the risks excluded, the calculation and payment of claims and premiums, and the period of agreement.
Q26.
How does an insurer achieve the desired level of reinsurance protection in treaty reinsurance?

a.

By entering into a single reinsurance treaty to cover certain loss exposures.

b.

By purchasing retrocession for each loss exposure.

c.

By purchasing numerous treaties until the desired level of reinsurance protection is achieved.

d.

By declining certain risks that fall within the scope of the treaty.

Discuss
Answer: (c).By purchasing numerous treaties until the desired level of reinsurance protection is achieved. Explanation:An insurer achieves the desired level of reinsurance protection in treaty reinsurance by purchasing numerous treaties until the desired level of reinsurance protection is achieved.
Q27.
What is retrocession in reinsurance?

a.

When a reinsurer reinsures another reinsurer.

b.

When an insurer declines certain risks that fall within the scope of the treaty.

c.

When a ceding insurer purchases numerous treaties until the desired level of reinsurance protection is achieved.

d.

When a reinsurer automatically accepts a certain liability for all risks falling within the scope of the agreement.

Discuss
Answer: (a).When a reinsurer reinsures another reinsurer. Explanation:Retrocession in reinsurance is when a reinsurance company reinsures another reinsurance company.
Q28.
What is the purpose of retrocession in reinsurance?

a.

To protect the reinsurer from catastrophic losses.

b.

To decline certain risks that fall within the scope of the treaty.

c.

To purchase numerous treaties until the desired level of reinsurance protection is achieved.

d.

To provide automatic cover to the ceding insurer.

Discuss
Answer: (a).To protect the reinsurer from catastrophic losses. Explanation:The purpose of retrocession in reinsurance is to protect the reinsurer from catastrophic losses.
Q29.
What is Treaty Reinsurance?

a.

It is a type of insurance that covers the reinsurer for all risks falling within the scope of the agreement.

b.

It is an agreement between the original insurer and the reinsurer whereby the reinsurer automatically accepts a certain liability for all risks falling within the scope of the agreement.

c.

It is a type of reinsurance where the reinsurer can decline risks falling within the scope of the agreement.

d.

It is an agreement between the original insurer and the reinsurer whereby the reinsurer accepts only a proportional liability for all risks falling within the scope of the agreement.

Discuss
Answer: (b).It is an agreement between the original insurer and the reinsurer whereby the reinsurer automatically accepts a certain liability for all risks falling within the scope of the agreement. Explanation:Treaty reinsurance is an agreement between the original insurer and the reinsurer whereby the reinsurer automatically accepts a certain liability for all risks falling within the scope of the agreement.
Q30.
What are the two types of basis on which Treaty reinsurance may be transacted?

a.

Complex and Simple basis

b.

Proportional and Non-proportional basis

c.

Regular and Irregular basis

d.

None of the above

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