BCP Insurance Contracts & Underwriting 2

Question 1

What is 'underinsurance' and why is it problematic in property insurance?

Accepted Answer

Insuring property for less than its full value, causing proportional claim reductions under the average clause

Answer

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'?

Accepted Answer

Reinsurance arranged on a case-by-case basis for individual risks

Answer

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?

Accepted Answer

An agreement where the cedant automatically cedes and the reinsurer automatically accepts a defined portfolio of risks

Answer

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?

Accepted Answer

The amount of each risk the cedant (primary insurer) keeps for its own account

Answer

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?

Accepted Answer

A standardized set of premium rates published for certain classes of insurance, providing consistency in pricing

Answer

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.

BCP Insurance Practice Test

BCP Insurance Practice Test

BCP Insurance Contracts & Underwriting 2