Methods of Reinsurance I MCQs

Welcome to our comprehensive collection of Multiple Choice Questions (MCQs) on Methods of Reinsurance I, a fundamental topic in the field of IC85 Reinsurance Management. Whether you're preparing for competitive exams, honing your problem-solving skills, or simply looking to enhance your abilities in this field, our Methods of Reinsurance I MCQs are designed to help you grasp the core concepts and excel in solving problems.

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Methods of Reinsurance I MCQs | Page 6 of 10

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Q51.
Can quota share and surplus methods be used together in a reinsurance treaty?

a.

Yes, they are often used in combination to protect a particular class of insurance business

b.

No, they are mutually exclusive and cannot be combined in a single treaty

c.

Only in certain countries or jurisdictions

d.

It depends on the size and nature of the risks being insured

Discuss
Answer: (a).Yes, they are often used in combination to protect a particular class of insurance business Explanation:Quota share and surplus methods can be used in combination to provide further protection to a particular class of insurance business.
Q52.
What is the difference between net and gross lines in surplus treaty agreements?

a.

Net lines are based on the ceding insurer's retention under the quota share treaty, while gross lines are based on the entire underlying quota share treaty limit.

b.

Net lines are based on the entire underlying quota share treaty limit, while gross lines are based on the ceding insurer's retention under the quota share treaty.

c.

Net lines and gross lines are the same thing and have no difference.

d.

Net lines are the total amount of premium ceded to the reinsurer, while gross lines are the total amount of premium retained by the ceding insurer.

Discuss
Answer: (a).Net lines are based on the ceding insurer's retention under the quota share treaty, while gross lines are based on the entire underlying quota share treaty limit. Explanation:Net lines are based on the ceding insurer's retention under the quota share treaty, while gross lines are based on the entire underlying quota share treaty limit. The difference between net and gross lines is significant and can affect the monetary limits of the treaty.
Q53.
Which of the following methods can assist in improving combined ratio?What is proportional reinsurance?

a.

RetrocessionWhen the reinsurer shares the liabilities of the insurer along with sum insured, premiums and claims in the same proportion as per agreement in the treaty.

b.

Quota share reinsuranceWhen the reinsurer only shares the liabilities of the insurer for premiums and claims.

c.

Facultative obligatory treatyWhen the reinsurer only shares the liabilities of the insurer for claims.

d.

Proportional reinsurance, if carefully structuredNone of the above.

Discuss
Answer: (b).Proportional reinsurance, if carefully structuredWhen the reinsurer shares the liabilities of the insurer along with sum insured, premiums and claims in the same proportion as per agreement in the treaty. Explanation:Proportional methods, if carefully structured, can assist in improving combined ratio over a period of time.Proportional reinsurance is when the reinsurer shares the liabilities of the insurer along with sum insured, premiums, and claims in the same proportion as per agreement in the treaty.
Q54.
What are the two types of proportional reinsurance?

a.

Surplus reinsurance and quota share reinsurance.

b.

Retrocession and treaty reinsurance.

c.

Facultative and obligatory treaty reinsurance.

d.

None of the above.

Discuss
Answer: (a).Surplus reinsurance and quota share reinsurance. Explanation:The two types of proportional reinsurance are surplus reinsurance and quota share reinsurance.
Q55.
What is surplus reinsurance?

a.

When the reinsurer decides what part of the original insurance he wishes to retain for his own account and reinsures (cedes) the balance with a reinsurer.

b.

When the reinsurer shares the liabilities of the insurer along with sum insured, premiums, and claims in the same proportion as per agreement in the treaty.

c.

When the insurer retains all of the original insurance and the reinsurer only shares the liabilities of the insurer for premiums and claims.

d.

None of the above.

Discuss
Answer: (a).When the reinsurer decides what part of the original insurance he wishes to retain for his own account and reinsures (cedes) the balance with a reinsurer. Explanation:Surplus reinsurance is when the reinsurer decides what part of the original insurance he wishes to retain for his own account and reinsures (cedes) the balance with a reinsurer.
Q56.
What is the ceding insurer's retention in surplus reinsurance?

a.

The maximum limit which the ceding insurer will retain, but may also actually retain a lesser amount as commensurate to risk exposure.

b.

The limit of liability which he wishes to retain on any one risk or class of risks.

c.

The percentage of retention and surplus were 10% and 90%, respectively.

d.

None of the above.

Discuss
Answer: (b).The limit of liability which he wishes to retain on any one risk or class of risks. Explanation:The ceding insurer's retention in surplus reinsurance is the limit of liability which he wishes to retain on any one risk or class of risks.
Q57.
How are the limits of surplus stated?

a.

Sum insured or probable maximum loss (PML).

b.

Retrocession or treaty reinsurance.

c.

Facultative or obligatory treaty reinsurance.

d.

None of the above.

Discuss
Answer: (a).Sum insured or probable maximum loss (PML). Explanation:The limits of surplus can be stated in two ways: sum insured or probable maximum loss (PML).
Q58.
What is probable maximum loss (PML)?

a.

The maximum amount which the ceding insurer is prepared to retain for his own account.

b.

The limit of liability which he wishes to retain on any one risk or class of risks.

c.

An underwriter's estimate of the maximum amount of damage that would probably occur in the event of an accident & base his decisions on retentions and reinsurance on such an estimate.

d.

None of the above.

Discuss
Answer: (c).An underwriter's estimate of the maximum amount of damage that would probably occur in the event of an accident & base his decisions on retentions and reinsurance on such an estimate. Explanation:Probable maximum loss (PML) is an underwriter's estimate of the maximum amount of damage that would probably occur in the event of an accident & base his decisions on retentions and reinsurance on such an estimate.
Q59.
In a combined quota share and surplus treaty, what is the purpose of the ceding insurer's retention under the quota share treaty?

a.

To ensure the reinsurer accepts only superior risks.

b.

To provide a maximum acceptance limit for the reinsurer.

c.

To establish the "line" on which the surplus treaty is based.

d.

To protect the ceding insurer from losses.

Discuss
Answer: (c).To establish the "line" on which the surplus treaty is based. Explanation:In a combined quota share and surplus treaty, the ceding insurer's retention under the quota share treaty becomes the "line" on which the surplus treaty is based. The ceding insurer cannot keep two retentions, one for each treaty.
Q60.
When arranging a surplus treaty agreement in conjunction with a quota share treaty, why is it important to determine whether the surplus treaty is based on net or gross lines?

a.

The difference in monetary limits can be significant.

b.

The ceding insurer may not be able to retain any risks for its own account.

c.

The reinsurer may not be willing to accept inferior risks.

d.

The surplus treaty may be terminated before the end of the treaty period.

Discuss
Answer: (a).The difference in monetary limits can be significant. Explanation:The difference in monetary limits between net and gross lines can be significant, and it is important to determine which method is being used in order to avoid any confusion or misunderstandings.
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