Forms of Reinsurance MCQs

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Forms of Reinsurance MCQs | Page 4 of 6

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Q31.
What rights does each party forego in a Treaty Reinsurance agreement?

a.

The reinsurer may not decline risks falling within the scope of the agreements.

b.

The insurer must allow all risks coming within the scope to be covered.

c.

Both a and b

d.

None of the above

Discuss
Answer: (c).Both a and b Explanation:Treaty reinsurance is an obligatory contract in which each party foregoes certain rights such as i) the reinsurer may not decline risks falling within the scope of the agreements and ii) the insurer must allow all risks coming within the scope to be covered.
Q32.
What is a formal treaty wording in Treaty Reinsurance?

a.

A document that describes the monetary limits and mode of operation.

b.

A document that describes the calculation and payment of claims, the calculation and payment of premiums, and the period of agreement.

c.

A document that describes the classes of business covered, the territorial scope, and the risks excluded.

d.

All of the above.

Discuss
Answer: (d).All of the above. Explanation:A formal treaty wording is usually drawn up by the parties to describe a) the monetary limits and mode of operation, b) the classes of business covered, the territorial scope, the risks excluded, and c) the calculation and payment of claims, the calculation and payment of premiums, and the period of agreement.
Q33.
What is the advantage of Treaty reinsurance over Facultative reinsurance in terms of administrative costs?

a.

Treaty reinsurance involves higher administrative costs than Facultative reinsurance.

b.

Treaty reinsurance involves lower administrative costs than Facultative reinsurance.

c.

Both Treaty and Facultative reinsurance involve similar administrative costs.

d.

None of the above.

Discuss
Answer: (b).Treaty reinsurance involves lower administrative costs than Facultative reinsurance. Explanation:Since treaty reinsurance provides automatic cover, the insurer is guaranteed a definite amount of reinsurance protection on every risk which he accepts. The administrative costs are therefore much lower than those applying to facultative reinsurance.
Q34.
ABC is a reinsurance company. It gets into a contract with another reinsurance company: XYZ Reinsurance Co. Ltd. Such contracts between two reinsurance companies are known as _______________

a.

Facultative reinsurance

b.

Treaty reinsurance

c.

Retrocession

d.

Facultative obligatory reinsurance

Discuss
Answer: (c).Retrocession Explanation:When a reinsurance company reinsures another reinsurance company, the process is known as Retrocession. Treaty reinsurance is an agreement between the original insurer and reinsurer, whereby the reinsurer automatically accepts a certain liability for all risks falling within the scope of the agreement. Facultative reinsurance is an agreement made for a single risk or a group of risks. Facultative obligatory reinsurance is a combination of facultative and treaty reinsurance, in which the cedent has the option to offer individual risks on a facultative basis or to cede them automatically under the terms of a standing agreement.
Q35.
What is Facultative Obligatory Treaty?

a.

A type of reinsurance contract where the ceding insurer may cede risks of any agreed class of insurance which the reinsurer must accept if ceded.

b.

A type of reinsurance contract where the ceding insurer has the option to cede specific risks to the reinsurer.

c.

A type of reinsurance contract where the reinsurer is obligated to accept all risks ceded by the ceding insurer.

d.

A type of reinsurance contract where the ceding insurer and the reinsurer share the risks on a pro-rata basis.

Discuss
Answer: (a).A type of reinsurance contract where the ceding insurer may cede risks of any agreed class of insurance which the reinsurer must accept if ceded. Explanation:Facultative Obligatory treaty is a contract of reinsurance whereby the ceding insurer may cede risks of any agreed class of insurance which the reinsurer must accept if ceded.
Q36.
Is Facultative Obligatory Treaty a common type of reinsurance contract?

a.

Yes, it is commonly used in the insurance industry.

b.

No, it is not commonly used in the insurance industry.

c.

It is used only in life reassurance.

d.

It is used only during weak reinsurance market conditions.

Discuss
Answer: (b).No, it is not commonly used in the insurance industry. Explanation:At present, Facultative Obligatory treaty is not common though one would come across such arrangement in life reassurance.
Q37.
Why is the ceding commission for Facultative Obligatory treaties progressively less than the quota share and surplus treaties?

a.

Because of lack of a premium to loss exposure balance and spread of portfolio.

b.

Because it is used only in life reassurance.

c.

Because it is used only during weak reinsurance market conditions.

d.

Because of high exposure and high premium.

Discuss
Answer: (a).Because of lack of a premium to loss exposure balance and spread of portfolio. Explanation:The ceding commission for facultative obligatory treaties is progressively less than the quota share and surplus treaties because of lack of a premium to loss exposure balance and spread of portfolio.
Q38.
For what purposes is Facultative Obligatory Treaty used?

a.

To arrange automatic additional capacity for surplus after exhausting existing automatic arrangements for reinsurance cessions.

b.

To facilitate writing of high value exposures or to deal with high accumulation.

c.

Where net retention is lowered on account of the degree of hazard this would back up the additional capacity as required.

d.

All of the above.

Discuss
Answer: (d).All of the above. Explanation:Facultative Obligatory Treaty is used to arrange automatic additional capacity for surplus after exhausting existing automatic arrangements for reinsurance cessions, to facilitate writing of high value exposures or to deal with high accumulation, and where net retention is lowered on account of the degree of hazard this would back up the additional capacity as required.
Q39.
________________ is a contract of reinsurance whereby the ceding insurer may cede risks of any agreed class of insurance which the reinsurer must accept if ceded.

a.

Facultative reinsurance

b.

Treaty reinsurance

c.

Facultative obligatory reinsurance

d.

Retrocession

Discuss
Answer: (c).Facultative obligatory reinsurance Explanation:Facultative obligatory treaty is a combination of facultative and treaty forms of reinsurance, whereby the ceding insurer can cede risks of any agreed class of insurance which the reinsurer must accept if ceded.
Q40.
What is the purpose of a reinsurance contract?How many ways can a reinsurance contract be arranged?

a.

To provide coverage for the reinsurer's own lossesOne

b.

To indemnify the ceding insurer for losses covered by the contractTwo

c.

To provide coverage for risks outside the scope of the original insurance policyThree

d.

To share profits between the ceding insurer and the reinsurerFour

Discuss
Answer: (b).To indemnify the ceding insurer for losses covered by the contractTwo Explanation:A reinsurance contract is an agreement between an insurer and a reinsurer where the reinsurer agrees to indemnify the insurer for losses covered by the contract.There are two ways a reinsurance contract can be arranged: Facultative and Treaty.
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