CAS Reinsurance Concepts and Applications 2 — Questions and Answers
Question 1: In excess of loss reinsurance, what is the term for the amount the ceding company pays before the reinsurer's coverage begins?
- Cession
- Attachment point (retention) (Correct answer)
- Burning cost
- Treaty limit
Correct answer: Attachment point (retention)
The attachment point (also called the retention) is the dollar amount of loss the ceding company must absorb before the reinsurer begins paying under an excess of loss structure.
Question 2: Which reinsurance pricing method calculates the reinsurer's expected loss cost based on historical loss experience adjusted for trend and development?
- Exposure rating
- Experience rating (burning cost method) (Correct answer)
- Payback period method
- Index-linked pricing
Correct answer: Experience rating (burning cost method)
The burning cost (experience rating) method prices reinsurance by analyzing historical losses that exceeded the retention, trended and developed to current levels, to estimate future reinsurer costs.
Question 3: What does the term 'reinsurance recoverable' represent on a primary insurer's balance sheet?
- The maximum limit of reinsurance coverage purchased
- Amounts owed to the primary insurer by reinsurers for ceded losses (Correct answer)
- The unearned premium reserve transferred to reinsurers
- The profit commission earned by the ceding company
Correct answer: Amounts owed to the primary insurer by reinsurers for ceded losses
Reinsurance recoverables are amounts the primary insurer expects to collect from its reinsurers for ceded claims that have been paid or are outstanding, appearing as an asset on the balance sheet.
Question 4: In surplus share reinsurance, the amount ceded is based on which factor?
- A fixed percentage applied to all policies
- The amount by which the policy limit exceeds the ceding company's retention line (Correct answer)
- The aggregate losses of the portfolio for the year
- The individual loss amounts as they occur
Correct answer: The amount by which the policy limit exceeds the ceding company's retention line
In surplus share reinsurance, the ceded amount is the portion of the policy limit that exceeds the ceding company's net retention line, so larger policies cede a higher proportion to the reinsurer.
Question 5: What is a 'loss corridor' in an aggregate reinsurance structure?
- A range of aggregate losses where the ceding company retains 100% of losses (Correct answer)
- The geographic area covered by catastrophe reinsurance
- The time window during which losses can be reported to the reinsurer
- A buffer between the primary attachment point and reinsurance limit
Correct answer: A range of aggregate losses where the ceding company retains 100% of losses
A loss corridor is a band within the reinsurance structure where the ceding company bears all losses itself, often placed between two layers of reinsurance, reducing the reinsurer's exposure and premium cost.
Question 6: Under the 'follow the fortunes' doctrine in reinsurance, what obligation does the reinsurer have?
- To follow the investment strategy of the ceding company
- To pay its share of losses as long as the ceding company settled them in good faith (Correct answer)
- To adjust its pricing annually based on the ceding company's profits
- To provide coverage only when the primary policy is also paying
Correct answer: To pay its share of losses as long as the ceding company settled them in good faith
The 'follow the fortunes' doctrine requires the reinsurer to pay its share of settlements made by the ceding company in good faith, even if the reinsurer might have resolved the claim differently.
Question 7: Which term describes reinsurance purchased to protect a specific layer of losses, from one attachment point up to a higher limit, without regard to individual risk?
- Quota share layer
- Per occurrence excess of loss layer (Correct answer)
- Facultative certificate
- Aggregate treaty band
Correct answer: Per occurrence excess of loss layer
A per occurrence excess of loss layer covers losses from a single occurrence that fall between the attachment point and the upper limit, protecting the ceding company from large individual events.
CAS Reinsurance Concepts and Applications 2
In excess of loss reinsurance, what is the term for the amount the ceding company pays before the reinsurer's coverage begins?