Methods of Reinsurance I MCQs

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Methods of Reinsurance I MCQs | Page 4 of 10

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Q31.
How are premiums and claims shared in Fixed Quota Share Reinsurance?

a.

They are subject to different percentages for premiums and claims.

b.

They are subject to the same percentage for both premiums and claims.

c.

Premiums are subject to a fixed percentage, and claims are subject to a variable percentage.

d.

None of the above.

Discuss
Answer: (b).They are subject to the same percentage for both premiums and claims. Explanation:In Fixed Quota Share Reinsurance, premiums and claims are subject to the same percentage.
Q32.
How is Variable Quota Share Reinsurance graduated to align with the occupancy of risk?

a.

The percentage of retention is fixed for all risks.

b.

The percentage of retention is higher for higher occupancy risks.

c.

The percentage of retention is lower for higher occupancy risks.

d.

None of the above.

Discuss
Answer: (c).The percentage of retention is lower for higher occupancy risks. Explanation:In Variable Quota Share Reinsurance, the percentage of retention is graduated to align with the occupancy of risk, and it is lower for higher occupancy risks.
Q33.
What is quota share reinsurance?

a.

A type of proportional reinsurance where the reinsurer assumes an agreed percentage of each risk and shares all premiums and losses accordingly with the reinsured.

b.

A type of excess of loss reinsurance where the reinsurer covers losses in excess of a predetermined retention level.

c.

A type of facultative reinsurance where the reinsurer assesses each risk on an individual basis.

d.

None of the above.

Discuss
Answer: (a).A type of proportional reinsurance where the reinsurer assumes an agreed percentage of each risk and shares all premiums and losses accordingly with the reinsured. Explanation:Quota share reinsurance can be defined as a type of proportional reinsurance where the reinsurer assumes an agreed percentage of each risk and shares all premiums and losses accordingly with the reinsured.
Q34.
How is the percentage of retention determined in fixed quota share reinsurance?

a.

It varies based on the underwriter's judgement.

b.

It is determined as part of the reinsurance program design.

c.

It is calculated based on the ceding insurer's profitability.

d.

None of the above.

Discuss
Answer: (b).It is determined as part of the reinsurance program design. Explanation:The percentage of retention in fixed quota share reinsurance is determined as part of the reinsurance program design.
Q35.
Why are quota share treaties usually more profitable to reinsurers?

a.

They participate in each and every risk on the same basis as the ceding insurer.

b.

The selection against them is avoided.

c.

They receive a higher rate of ceding commission.

d.

Both a and b

Discuss
Answer: (d).Both a and b Explanation:Quota share treaties are usually more profitable to reinsurers because they participate in each and every risk on the same basis as the ceding insurer and the selection against them, present in the surplus treaty, is avoided.
Q36.
Why is the quota share method adopted for short-term specialized requirements rather than as a long-term arrangement?

a.

It is more expensive for the ceding insurer.

b.

The ceding insurer passes a large share of his premium income (and his profit) to his reinsurer.

c.

It is less flexible than other reinsurance methods.

d.

None of the above.

Discuss
Answer: (b).The ceding insurer passes a large share of his premium income (and his profit) to his reinsurer. Explanation:The quota share method is adopted for short-term specialized requirements rather than as a long-term arrangement because the ceding insurer passes a large share of his premium income (and his profit) to his reinsurer, which is a high cost to the ceding insurer.
Q37.
When is quota share reinsurance protection typically used by a newly established insurer?

a.

When the insurer has a large amount of capital in relation to the insurance business they want to write.

b.

When the insurer is entering a new class of insurance business or a new territory.

c.

When the insurer has a large portfolio of a reasonable size.

d.

None of the above.

Discuss
Answer: (b).When the insurer is entering a new class of insurance business or a new territory. Explanation:Quota share reinsurance protection is typically used by a newly established insurer with low capital in relation to the insurance business they want to write until such time they have built up a portfolio of a reasonable size. It is also used by a ceding insurer entering a new class of insurance business or a new territory.
Q38.
In the surplus method, who decides the limit of liability which can be retained on any one risk or class of risk?

a.

Policyholder

b.

Intermediary

c.

Ceding insurer

d.

Reinsurer

Discuss
Answer: (c).Ceding insurer Explanation:In the surplus method, the limit of liability which can be retained on any one risk or class of risk is decided by the ceding insurer, who decides how much of the risk to retain and how much to cede to the reinsurer. The ceding insurer retains a certain percentage of the risk, known as the retention, and cedes the remainder to the reinsurer. This percentage can vary depending on the nature of the risk and the ceding insurer's appetite for risk. The reinsurer then assumes a corresponding percentage of the risk, and pays a corresponding percentage of the premium.
Q39.
What is a "line" in a surplus treaty?What happens if the ceding insurer decides to retain only Rs. 3,00,000 for a particular risk under a surplus treaty?

a.

The amount of premium paid by the ceding insurerThe amount ceded to the treaty for that particular risk cannot exceed Rs. 30,00,000

b.

The number of risks covered by the treatyThe ceding insurer must bear the balance for his own account

c.

The amount ceded to the surplus treaty equal to the ceding insurer's retentionThe reinsurer is required to pay the difference between the retention and the sum insured

d.

The amount ceded to the surplus treaty in excess of the ceding insurer's retentionThe ceding insurer must affect further reinsurance facultatively for that particular risk

Discuss
Answer: (b).The amount ceded to the surplus treaty equal to the ceding insurer's retentionThe amount ceded to the treaty for that particular risk cannot exceed Rs. 30,00,000 Explanation:In a surplus treaty, a "line" is equal to the ceding insurer's retention. For example, if a ceding insurer has a ten line surplus treaty on the basis of a maximum retention of Rs. 5,00,000, the capacity of the treaty to absorb liability over and above the retention would be Rs. 50,00,000 (10 x Rs. 5,00,000), and the ceding insurer would have automatic protection for policies having sums insured up to Rs. 55,00,000.If the ceding insurer decides to retain only Rs. 3,00,000 for a particular risk under a surplus treaty, the amount ceded to the treaty for that particular risk cannot exceed Rs. 30,00,000 (being 10 x Rs. 3,00,000).
Q40.
What is a "line" in a surplus treaty?

a.

The amount of premium paid by the ceding insurer

b.

The number of risks covered by the treaty

c.

The amount ceded to the surplus treaty equal to the ceding insurer's retention

d.

The amount ceded to the surplus treaty in excess of the ceding insurer's retention

Discuss
Answer: (c).The amount ceded to the surplus treaty equal to the ceding insurer's retention Explanation:In a surplus treaty, a "line" is equal to the ceding insurer's retention. For example, if a ceding insurer has a ten line surplus treaty on the basis of a maximum retention of Rs. 5,00,000, the capacity of the treaty to absorb liability over and above the retention would be Rs. 50,00,000 (10 x Rs. 5,00,000), and the ceding insurer would have automatic protection for policies having sums insured up to Rs. 55,00,000.
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