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 7 of 10

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Q61.
What is the purpose of a profit commission?

a.

To increase the reinsurance premium paid by the ceding insurer

b.

To return a percentage of the profits of the treaty for the treaty year to the ceding insurer

c.

To reduce the ceding commission paid by the ceding insurer

d.

To decrease the level of surplus in the surplus treaty

Discuss
Answer: (b).To return a percentage of the profits of the treaty for the treaty year to the ceding insurer Explanation:The purpose of a profit commission is to return a percentage of the profits of the treaty for the treaty year to the ceding insurer. If the results under a treaty are profitable, the reinsurer may agree a further commission called a profit commission.
Q62.
What is ORC?

a.

Original reinsurance commission

b.

Overriding commission

c.

Operational risk charge

d.

None of the above

Discuss
Answer: (b).Overriding commission Explanation:ORC stands for overriding commission. In certain classes of insurance business, where reinsurance premiums are paid on a "net" basis, that is, less original commission, the reinsurer will only allow an overriding commission, ORC, to cover the ceding insurer's original costs of acquisition.
Q63.
What is the definition of reinsurance premium?

a.

A percentage of the original premium paid by the insured to the reinsurer

b.

The premium paid by the ceding insurer to the insured

c.

The premium paid by the reinsurer to the ceding insurer

d.

The premium paid by the insured to the ceding insurer

Discuss
Answer: (a).A percentage of the original premium paid by the insured to the reinsurer Explanation:The reinsurance premium is a percentage of the original premium paid by the insured to the reinsurer.
Q64.
What risks are excluded from the reinsurance premium?

a.

Any risks included in the treaty

b.

Any risks excluded from the treaty

c.

Any return premiums due under cancelled policies

d.

Commissions paid by the ceding insurer to agents and brokers

Discuss
Answer: (b).Any risks excluded from the treaty Explanation:The premiums for any risks excluded from the treaty and return premiums due under cancelled policies are not included in the reinsurance premium.
Q65.
What is ceding commission?How is the ceding commission calculated?

a.

The commission paid by the reinsurer to the ceding insurerOn the original premium paid by the insured

b.

The commission paid by the ceding insurer to the reinsurerOn the reinsurance premium ceded by the ceding insurer

c.

The commission paid by the ceding insurer to agents and brokersOn the sum insured ceded by the ceding insurer

d.

The commission paid by the reinsurer to agents and brokersOn the earned premium for the treaty year

Discuss
Answer: (b).The commission paid by the ceding insurer to the reinsurerOn the reinsurance premium ceded by the ceding insurer Explanation:The reinsurer agrees a commission by way of a percentage of the reinsurance premium given to him, known as ceding commission, to the ceding insurer to compensate for his original commissions and brokerages, acquisition cost, costs of keeping the business on the books, and administration expenses.The ceding commission is calculated on the ceded premium by applying the agreed percentage as set out in the treaty slip and agreed. This is incorporated in the treaty document.
Q66.
What is the quota share treaty?

a.

A treaty that puts in more level of exposure for lesser reinsurance premium ceded to reinsurers

b.

A treaty that assists for a higher ceding commission as compared to a surplus treaty

c.

A treaty that allows for a higher level of surplus, such as second and third surplus

d.

A treaty that has a lower ceding commission as compared with the first surplus treaty

Discuss
Answer: (a).A treaty that puts in more level of exposure for lesser reinsurance premium ceded to reinsurers Explanation:A quota share treaty would assist for a higher ceding commission as compared to a surplus treaty as the latter puts in more level of exposure for lesser reinsurance premium ceded to reinsurers.
Q67.
What is profit commission?

a.

A further commission agreed by the reinsurer to the ceding insurer if the results under a treaty are profitable

b.

A commission paid by the ceding insurer to the reinsurer if the results under a treaty are profitable

c.

A commission paid by the ceding insurer to agents and brokers

d.

A commission paid by the reinsurer to agents and brokers

Discuss
Answer: (a).A further commission agreed by the reinsurer to the ceding insurer if the results under a treaty are profitable Explanation:Where the results under a treaty are profitable, the reinsurer may agree a further commission called a profit commission. By this method, a percentage of the profits of the treaty for the treaty year are returned to the ceding insurer.
Q68.
What is the formula to calculate profit to the treaty?

a.

Profit to the Treaty = Earned premium - Incurred claims - Ceding commission

b.

Profit to the Treaty = Earned premium + Incurred claims - Ceding commission

c.

Profit to the Treaty = Earned premium - Incurred claims + Ceding commission

d.

Profit to the Treaty = Earned premium + Incurred claims + Ceding commission

Discuss
Answer: (a).Profit to the Treaty = Earned premium - Incurred claims - Ceding commission Explanation:The formula to calculate profit to the treaty is Profit to the Treaty = Earned premium - Incurred claims - Ceding commission.
Q69.
When does the reinsurer's liability begin under a proportional treaty?

a.

Simultaneously with that of the ceding insurer

b.

After the ceding insurer accepts the risk

c.

At the end of the ceding insurer's financial year

d.

Only for policies issued after the inception of the treaty

Discuss
Answer: (a).Simultaneously with that of the ceding insurer Explanation:Under a proportional treaty, the reinsurer's liability commences simultaneously with that of the ceding insurer.
Q70.
What happens if a loss occurs before the cession was made under a proportional treaty?

a.

The reinsurer is not liable for any proportion

b.

The reinsurer is liable for the full loss

c.

The reinsurer is liable for the proportion that would have been ceded

d.

The ceding insurer is solely liable for the loss

Discuss
Answer: (c).The reinsurer is liable for the proportion that would have been ceded Explanation:If a loss should occur before the cession was made, the reinsurer will still be liable for the proportion that would have been ceded.
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