BCP Reinsurance Concepts and Practices 1 — Questions and Answers
Question 1: What is the primary purpose of reinsurance?
- To allow insurers to transfer portions of risk to other insurers to reduce potential losses (Correct answer)
- To enable policyholders to purchase coverage from multiple insurers simultaneously
- To allow the government to regulate the insurance market more effectively
- To provide insurers with investment opportunities through premium pooling
Correct answer: To allow insurers to transfer portions of risk to other insurers to reduce potential losses
Reinsurance allows a primary insurer (cedant) to transfer part of the risk it has underwritten to another insurer (reinsurer), thereby reducing its potential exposure to large losses.
Question 2: In reinsurance terminology, what is a 'cedant'?
- The reinsurance broker who arranges the reinsurance contract
- The primary insurer that transfers part of its risk to a reinsurer (Correct answer)
- The government regulator overseeing reinsurance transactions
- The policyholder who purchases coverage from a reinsurance company
Correct answer: The primary insurer that transfers part of its risk to a reinsurer
A cedant (also called the ceding company) is the primary insurer that cedes (transfers) a portion of its underwritten risk to a reinsurer under a reinsurance arrangement.
Question 3: What distinguishes treaty reinsurance from facultative reinsurance?
- Treaty reinsurance covers individual risks, while facultative covers entire portfolios
- Treaty reinsurance is compulsory by law, while facultative is voluntary
- Treaty reinsurance covers a defined portfolio of risks automatically, while facultative covers individual risks negotiated case by case (Correct answer)
- Treaty reinsurance is arranged by brokers, while facultative is arranged directly with reinsurers
Correct answer: Treaty reinsurance covers a defined portfolio of risks automatically, while facultative covers individual risks negotiated case by case
Under a treaty, the reinsurer automatically accepts all risks within the agreed portfolio, whereas facultative reinsurance involves individual negotiation for each specific risk.
Question 4: What is 'proportional reinsurance'?
- A type of reinsurance where the reinsurer pays a fixed dollar amount regardless of loss size
- A reinsurance arrangement where the reinsurer shares premiums and losses in an agreed proportion (Correct answer)
- A reinsurance arrangement triggered only when aggregate losses exceed a threshold
- A type of reinsurance limited to property insurance classes only
Correct answer: A reinsurance arrangement where the reinsurer shares premiums and losses in an agreed proportion
In proportional reinsurance, the reinsurer participates in both premiums and losses according to an agreed ratio, sharing risk in the same proportion as the premium allocation.
Question 5: What is 'retrocession' in the context of reinsurance?
- When a cedant cancels its reinsurance treaty before expiry
- When a reinsurer transfers part of the risk it has accepted to another reinsurer (Correct answer)
- When the primary insurer reclaims risks previously ceded to a reinsurer
- When MAS approves a reinsurance arrangement retroactively
Correct answer: When a reinsurer transfers part of the risk it has accepted to another reinsurer
Retrocession is the process by which a reinsurer cedes part of the risk it has accepted to another reinsurer (called a retrocessionaire), further spreading the risk in the market.
Question 6: Which of the following best describes 'retention' in reinsurance?
- The commission paid by the reinsurer to the cedant for placing business
- The portion of risk that the cedant keeps for its own account rather than ceding (Correct answer)
- The minimum premium required under a reinsurance treaty
- The period during which claims must be reported to the reinsurer
Correct answer: The portion of risk that the cedant keeps for its own account rather than ceding
Retention is the amount of risk the primary insurer chooses to keep on its own account; any risk above the retention level is ceded to the reinsurer.
Question 7: Under Singapore's regulatory framework, which authority supervises reinsurers operating in Singapore?
- Singapore Exchange (SGX)
- Monetary Authority of Singapore (MAS) (Correct answer)
- General Insurance Association of Singapore (GIA)
- Singapore Reinsurance Association (SRA)
Correct answer: Monetary Authority of Singapore (MAS)
The Monetary Authority of Singapore (MAS) is the integrated regulator and supervisor of all insurance and reinsurance entities operating in Singapore under the Insurance Act.
BCP Reinsurance Concepts and Practices 1
What is the primary purpose of reinsurance?