Chapter 6

Question 1

Which of the following describes treaty reinsurance?

Answer 1

It is a broad agreement covering some part of a class or classes of business

Question 2

Which of the following describes facultative reinsurance?

Answer 2

It is frequently placed on a risk-by-risk basis

Question 3

Which of the following statements is true?

Answer 3

Reinsurance in simple terms is the retransfer of risk.

Question 4

Which of the following are examples of limiting liability for an insurer?

Answer 4

Reinsurance is purchased on an excess-of-loss basis for all exposures in excess of $5
million.

Question 5

Which of the following describes unearned premium?

Answer 5

d. All of the above.
Rationale: The premium the insurer receives for a policy at the outset is unearned premium and cannot
be immediately recorded as revenue. The premium gradually becomes revenue as it is earned over the
policy period. The unearned premium reserve (UEPR) is a liability for the insurer that diminishes over the
policy period as more premium is earned and becomes revenue—that is, earned premium.

Question 6

What effect does competition between insurers have on reinsurers?

Answer 6

It may impact a reinsurer’s interest to participate in proportional reinsurance.

Question 7

Which of the following is true of an unlicensed reinsurer?

Answer 7

It is not governed by any of the regulatory bodies in Canada and so is not scrutinized for
solvency by those bodies.

Question 8

Which of the following apply to the limit of reinsurance and the net retention?

Answer 8

All of the above.
Rationale: The insurer should purchase reinsurance limits high enough to cover the limits on the primary
policy. If the primary policy pays for ALAE or PJI in addition to the limit, then the reinsurance limit will not
completely protect the primary insurer in the event of a loss and expenses that exceed the maximum limit.
One alternative is to purchase additional reinsurance limits to reflect an estimate of the likely maximum
sum of a loss, ALAE, and PJI. The most important thing for the underwriter is to ensure that the
reinsurance matches the policy exposure so that the purchased limits are sufficient.

Question 9

What happens with each catastrophic event?

Answer 9

Catastrophe treaties provide one aggregate limit.

Question 10

Which of the following statements best explains the function of stop loss reinsurance?

Answer 10

It is used by the insurer to protect overall underwriting results after the application of
other specific reinsurance.
b. It is used to indemnify the ins

Question 11

List five things reinsurance allows when used effectively. (5 marks)

Answer 11

Purposes of reinsurance:
* Enables underwriters to write larger risks or a larger share of risks
* Enables underwriters to be able to write a greater share of high-hazard risks
* Helps provide protection for overall underwriting results
* Allows the insurer to write program or niche lines of business
* Helps the insurer gain market share

Question 12

Reasons insurers purchase reinsurance:

Answer 12

Limits liability
* Stabilizes loss experience
* Protects against catastrophe
* Increases capacity
* When entering or withdrawing from a particular market

Question 13

Insurer’s concerns when setting a retention (any five of the following):

Answer 13

The availability of reinsurance
* The level of the insurer’s returns on investment
* The profitability of the business being written
* The amount of available surplus (the amount by which assets exceed liabilities)
* The amount of loss the insurer can afford
* The cost of reinsurance and whether the level of protection offsets the cost
* Whether the insurer’s earned loss ratio is acceptable
* Whether the level of retention is so low that the insurer is merely trading dollars for the protection

Question 14

List five factors affecting reinsurers. (5 marks)

Answer 14

Factors affecting reinsurers (any five of the following):
* Global events and consolidated results for reinsurers’ corporate parents
* Competition between insurers
Competition from other reinsurers
* Insolvencies
* Corporate influence from ceding companies
* Rating agencies
* Emerging exposures

Question 15

How global catastrophes affect reinsurers:

Answer 15

Insurance is an international business
* Reinsurers have subsidiaries or branches in countries around the world
* All books of business they reinsure in these countries may be affected by a catastrophe in any one of
them
* A reinsurer’s exposure to catastrophic events can be huge
* Events such as terrorist attacks or hurricanes can cause property rates to rise and capacity to fall
everywhere

Question 16

How competition between insurers affects reinsurers (any five of the following):

Answer 16

As more insurers compete for larger shares of the market, they begin to cut rates
* Rate cuts affect underwriting results for the quota share reinsurer, which assumes a proportionate
share of the insurer’s premium and losses
* Rate cuts may hurt a quota share reinsurer more than an insurer because the reinsurer’s share of the
premium is reduced by the ceding commission it has likely paid the insurer
* Fewer dollars are available to the reinsurer to pay its share of the insurer’s losses
* Even rate increases by insurers might not encourage a reinsurer’s appetite for quota share
reinsurance if adverse loss development has been hurting the results of prior accident years