BCP Insurance Contracts & Underwriting 2 — Questions and Answers
Question 1: What is 'underinsurance' and why is it problematic in property insurance?
- Insuring property for more than its value
- Insuring property for less than its full value, causing proportional claim reductions under the average clause (Correct answer)
- Having too many policies on one property
- Purchasing insurance with too many exclusions
Correct answer: Insuring property for less than its full value, causing proportional claim reductions under the average clause
Underinsurance occurs when property is insured for less than its full value. Under the average clause, any claim is reduced proportionally (sum insured / actual value × loss), meaning the insured effectively self-insures the shortfall.
Question 2: What is 'facultative reinsurance'?
- Automatic reinsurance for all policies in a treaty
- Reinsurance arranged on a case-by-case basis for individual risks (Correct answer)
- Reinsurance arranged by government mandate
- Reinsurance for catastrophic events only
Correct answer: Reinsurance arranged on a case-by-case basis for individual risks
Facultative reinsurance is arranged on a case-by-case basis for individual risks. The cedant offers the risk and the reinsurer has the 'faculty' (option) to accept or decline it, unlike treaty arrangements.
Question 3: What is a 'treaty reinsurance' arrangement?
- A reinsurance arrangement negotiated risk by risk
- An agreement where the cedant automatically cedes and the reinsurer automatically accepts a defined portfolio of risks (Correct answer)
- A reinsurance arrangement with government-owned reinsurers only
- An international agreement between countries on reinsurance
Correct answer: An agreement where the cedant automatically cedes and the reinsurer automatically accepts a defined portfolio of risks
Treaty reinsurance is an automatic arrangement where the cedant agrees to cede, and the reinsurer agrees to accept, all risks falling within a defined class or portfolio, without individual negotiation for each risk.
Question 4: What does 'retention' mean in the context of reinsurance?
- The reinsurer retaining premiums after a claim
- The amount of each risk the cedant (primary insurer) keeps for its own account (Correct answer)
- The period the reinsurance treaty remains in force
- The insurer retaining cancelled policies
Correct answer: The amount of each risk the cedant (primary insurer) keeps for its own account
Retention is the amount or proportion of each risk that the cedant (primary insurer) keeps on its own account. Losses up to the retention are borne entirely by the cedant; amounts above are passed to the reinsurer.
Question 5: What is the purpose of a 'tariff' in insurance underwriting?
- A tax imposed on insurance premiums by the government
- A standardized set of premium rates published for certain classes of insurance, providing consistency in pricing (Correct answer)
- A list of excluded perils under a standard policy
- A schedule of agent commissions
Correct answer: A standardized set of premium rates published for certain classes of insurance, providing consistency in pricing
A tariff is a standardized set of premium rates for certain insurance classes, ensuring pricing consistency across the market. Singapore has moved away from many tariffs toward a free-market rating approach.
Question 6: What is 'risk survey' and why is it conducted before underwriting large risks?
- A survey of competitors' premium rates
- A physical inspection and assessment of the proposed risk to gather underwriting information and identify risk improvements (Correct answer)
- A survey of the policyholder's financial condition only
- A government-mandated registration process
Correct answer: A physical inspection and assessment of the proposed risk to gather underwriting information and identify risk improvements
A risk survey involves physical inspection of the proposed risk (e.g., a factory or commercial property) to gather detailed underwriting information, assess hazards, and identify risk improvement recommendations before the insurer decides to accept.
BCP Insurance Contracts & Underwriting 2
What is 'underinsurance' and why is it problematic in property insurance?