CU Reinsurance and Portfolio Management Flashcards

Which metric best measures the overall profitability of an underwriting portfolio before investment income?

Answer: Combined ratio

The combined ratio (loss ratio + expense ratio) indicates whether underwriting operations are profitable; a ratio below 100% signals underwriting profit.

A high premium-to-surplus ratio in an insurance portfolio indicates:

Answer: Potential overexposure relative to the insurer's financial strength

An elevated premium-to-surplus ratio signals that the insurer may be writing more business than its surplus can safely support, increasing insolvency risk.

In portfolio underwriting, 'adverse selection' refers to:

Answer: The tendency for higher-risk applicants to seek insurance more aggressively than lower-risk ones

Adverse selection occurs when the insured population skews toward higher-risk individuals because low-risk individuals may opt out, distorting expected loss ratios.

Which reinsurance structure is most commonly used to protect against catastrophic single-event losses such as hurricanes?

Answer: Catastrophe excess of loss (Cat XL)

Cat XL reinsurance is specifically designed to absorb losses from a single catastrophic occurrence that exceeds the cedent's retention.

When managing a book of business, 'risk diversification' is valuable because it:

Answer: Reduces the chance that losses across the portfolio will be highly correlated

Diversification across geographies, lines, and risk types lowers the probability that many losses occur simultaneously, stabilizing the portfolio's results.

A cedent's 'net retention' in a surplus share treaty is calculated as:

Answer: The maximum dollar amount of each risk the cedent keeps before ceding the surplus to reinsurers

In a surplus share treaty, the cedent retains a fixed dollar amount per risk (its line), ceding any exposure above that line to the reinsurer.