BCP - Basic Insurance Concepts and Principles Singapore Reinsurance and Co-insurance Questions and Answers

Question 1

An insurer in Singapore underwrites a policy for a large, complex industrial risk. To better manage its own financial exposure and solvency margin, the insurer transfers a portion of this risk to another insurance company. What is this practice called?

Accepted Answer

Reinsurance

Answer

Reinsurance is the practice where an insurer (the ceding company) transfers part of its risk portfolio to another insurer (the reinsurer). This is done to reduce the insurer's liability on individual risks, increase its underwriting capacity, and protect against catastrophic losses.

Question 2

A consortium of three Singaporean insurers agrees to underwrite the S$200 million property risk for a new commercial building. Insurer A accepts 50%, Insurer B accepts 30%, and Insurer C accepts 20%. If a valid claim of S$10 million arises from a fire, how much is Insurer C legally obligated to pay the policyholder?

Accepted Answer

S$2 million, based on its agreed share.

Answer

In a co-insurance arrangement, each insurer is severally (individually) liable for its pre-agreed percentage of the risk. Therefore, Insurer C is only liable for its 20% share of the S$10 million loss, which amounts to S$2 million.

Question 3

An underwriter at a Singapore-based insurance company is presented with a unique, high-value risk that is not covered under its existing automatic reinsurance agreements. The underwriter needs to secure reinsurance for this specific risk on a case-by-case basis. Which type of reinsurance should be sought?

Accepted Answer

Facultative Reinsurance

Answer

Facultative reinsurance is negotiated separately for each individual risk that the ceding insurer wishes to reinsure. This is distinct from treaty reinsurance, which is an obligatory agreement where the reinsurer automatically accepts all risks within a pre-defined class of business.

Question 4

A policyholder, SG Enterprises, has a fire insurance policy with Insurer X. Unknown to SG Enterprises, Insurer X has reinsured 40% of the risk with Reinsurer Y. Following a major fire, SG Enterprises submits a claim. What is the correct procedure for the claim?

Accepted Answer

SG Enterprises must claim the full amount from Insurer X.

Answer

The legal principle of privity of contract applies. The policyholder's contract is solely with the direct insurer (Insurer X). There is no contractual relationship between the policyholder and the reinsurer. Therefore, Insurer X is responsible for paying the full claim to SG Enterprises and will then seek recovery of the reinsured portion from Reinsurer Y.

Question 5

Which of the following is a primary distinction between co-insurance and reinsurance in the Singapore insurance market?

Accepted Answer

In co-insurance, the policyholder is aware of all participating insurers, whereas in reinsurance, the policyholder typically only deals with the direct insurer.

Answer

In a co-insurance arrangement, all participating insurers are party to the original contract and are typically listed on the policy schedule. In reinsurance, the arrangement is a separate contract between the ceding insurer and the reinsurer, and the original policyholder is not a party to it and may not even be aware of its existence.

BCP Insurance Practice Test

BCP Insurance Practice Test

BCP - Basic Insurance Concepts and Principles Singapore Reinsurance and Co-insurance Questions and Answers