ACE ACE Reinsurance & Treaty Concepts 1 — Questions and Answers
Question 1: What is the primary purpose of reinsurance in the US insurance market?
- To replace primary insurance policies
- To transfer a portion of risk from the primary insurer to another insurer (Correct answer)
- To regulate premium rates charged to policyholders
- To eliminate the need for underwriting
Correct answer: To transfer a portion of risk from the primary insurer to another insurer
Reinsurance allows a primary insurer to cede a portion of its risk exposure to a reinsurer, stabilizing its loss experience.
Question 2: In a proportional reinsurance treaty, how are premiums and losses shared?
- The reinsurer pays all losses above a fixed threshold
- Premiums and losses are shared in an agreed proportion between cedant and reinsurer (Correct answer)
- The cedant retains all premiums and the reinsurer covers all losses
- Losses are shared equally regardless of premium allocation
Correct answer: Premiums and losses are shared in an agreed proportion between cedant and reinsurer
In proportional (pro-rata) treaties, both premium income and loss payments are divided between the parties according to a predetermined ratio.
Question 3: Which reinsurance structure provides coverage only when aggregate losses exceed a specified retention?
- Quota share treaty
- Surplus share treaty
- Aggregate excess of loss (Correct answer)
- Facultative obligatory
Correct answer: Aggregate excess of loss
Aggregate (stop-loss) excess of loss reinsurance triggers once total losses in a period surpass the cedant's aggregate retention.
Question 4: What distinguishes a facultative reinsurance arrangement from a treaty arrangement?
- Facultative covers an entire portfolio automatically; treaties cover individual risks
- Facultative is negotiated risk-by-risk; treaties cover a defined class of business automatically (Correct answer)
- Facultative requires regulatory approval; treaties do not
- Facultative is only used for life insurance; treaties apply to property lines
Correct answer: Facultative is negotiated risk-by-risk; treaties cover a defined class of business automatically
Facultative reinsurance is placed individually for specific risks, while treaties provide automatic coverage for a book of business.
Question 5: Which ACORD form is commonly used to submit reinsurance bordereau data?
- ACORD 25
- ACORD 75
- ACORD 107
- ACORD 810 (Correct answer)
Correct answer: ACORD 810
ACORD 810 is the standard electronic message used for reinsurance bordereau (cession) reporting between cedants and reinsurers.
Question 6: What is the 'ceding commission' in a reinsurance agreement?
- A penalty paid by the reinsurer for late loss payments
- A fee charged by a reinsurance broker for placing business
- An amount paid by the reinsurer to the cedant to offset acquisition and overhead costs (Correct answer)
- A deposit held by the cedant against future losses
Correct answer: An amount paid by the reinsurer to the cedant to offset acquisition and overhead costs
The ceding commission compensates the primary insurer for the policy acquisition costs and administrative expenses embedded in the ceded premium.
ACE ACE Reinsurance & Treaty Concepts 1
What is the primary purpose of reinsurance in the US insurance market?