Chapter 7 Questions

Question 1

under what circumstances might facultative reinsurance be useful

Answer 1

reinsured requires capacity beyond that offered under the treaty reinsurance
risk is excluded from the scope of the reinsured’s treaty reinsurance
reinsured does not want to reinsure the risk to its treaty reinsurers
where reinsured may benefit from the reinsurer’s specialist knowledge and experience
unique commercial, financial or strategic reasons

Question 2

name disadvantages of facultative reinsurance

Answer 2

cedant cannot be certain of the placement and this could affect its ability to underwrite the underlying risk
insurer may lose control over handling of risk
can undermine any potential profit in an account

Question 3

two main types of proportional reinsurance

Answer 3

quota share
surplus

Question 4

two main types of non proportional reinsurance

Answer 4

excess of loss
stop loss

Question 5

what sort of losses does a stop loss cover protect against

Answer 5

accumulation of relatively small losses making a significant impact on the underwriting result

Question 6

what type of information is requested by a reinsurance underwriter

Answer 6

underwriting strategy and risk appetite
portfolio analysis
geographical scope
basis of acceptance
claims experience
additional information

Question 7

what is co insurance

Answer 7

partial risk transfer

Question 8

what is the relationship between reinsurance capacity and the premium

Answer 8

when capacity is restricted the premium will be high (hard market), when capacity is plentiful the premium will be lower (soft market)

Question 9

when is an insurer most likely to arrange facultative insurance

Answer 9

to cover terrorism risk on a commercial property

Question 10

the maximum capacity that an insurer will accept for a single risk is based on its

Answer 10

capital position and costs of reinsurance

Question 11

what is a key disadvantage for an insurer that arranges reinsurance on a treaty basis

Answer 11

there is typically no ability to cancel the contract mid term

Question 12

When arranging their insurance, the insured agrees to cover the first £100,000 of any potential loss with the insurer covering the balance up to the actual claim value. What is this type of insurance known as

Answer 12

co insurance

Question 13

With liability insurance, despite taking steps to identify and control the potential aggregation risk of several insureds being involved in one event, what other action is an insurer most likely to take to protect itself

Answer 13

take out clash reinsurance

Question 14

a characteristic of a soft reinsurance market is that

Answer 14

insurers gain more bargaining power over reinsurers