BCP Reinsurance Concepts and Practices 2

Question 1

What is 'quota share' reinsurance?

Accepted Answer

The reinsurer accepts a fixed percentage of every risk in a portfolio, sharing premiums and losses in that proportion

Answer

In quota share reinsurance, the cedant cedes a fixed percentage of every risk to the reinsurer, with premiums and losses shared in that same fixed proportion throughout the portfolio.

Question 2

How does 'surplus reinsurance' differ from 'quota share' reinsurance?

Accepted Answer

In surplus reinsurance, the cedant retains a fixed monetary amount and cedes only the surplus above that retention

Answer

In surplus reinsurance, the cedant retains a fixed amount (the 'line') on each risk and cedes the surplus above that retention, meaning the cession percentage varies by risk size.

Question 3

What is 'excess of loss' reinsurance?

Accepted Answer

A non-proportional arrangement where the reinsurer pays losses exceeding the cedant's retention up to an agreed limit

Answer

Excess of loss (XL) reinsurance is non-proportional; the reinsurer only pays when a loss exceeds the cedant's agreed retention (deductible) and covers losses up to the reinsurer's liability limit.

Question 4

What is a 'stop loss' reinsurance arrangement?

Accepted Answer

A non-proportional arrangement where the reinsurer pays when the cedant's aggregate losses in a period exceed a defined percentage of premiums

Answer

Stop loss reinsurance protects the cedant against an adverse overall loss ratio by triggering reinsurer payments when aggregate losses exceed a defined threshold, typically expressed as a percentage of earned premiums.

Question 5

What is a 'ceding commission' in a proportional reinsurance treaty?

Accepted Answer

A commission paid by the reinsurer to the cedant to cover the cedant's acquisition and administration costs

Answer

A ceding commission is paid by the reinsurer back to the cedant as a contribution toward the cedant's original acquisition costs (e.g., agent commissions) and administration expenses on the ceded business.

BCP Insurance Practice Test

BCP Insurance Practice Test

BCP Reinsurance Concepts and Practices 2