CU CU Reinsurance and Portfolio Management 2 — Questions and Answers
Question 1: Which metric best measures the overall profitability of an underwriting portfolio before investment income?
- Net promoter score
- Combined ratio (Correct answer)
- Expense loading factor
- Premium-to-surplus ratio
Correct answer: Combined ratio
The combined ratio (loss ratio + expense ratio) indicates whether underwriting operations are profitable; a ratio below 100% signals underwriting profit.
Question 2: A high premium-to-surplus ratio in an insurance portfolio indicates:
- Excellent investment returns
- Potential overexposure relative to the insurer's financial strength (Correct answer)
- A conservative underwriting strategy
- Compliance with NAIC minimum capital standards
Correct 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.
Question 3: In portfolio underwriting, 'adverse selection' refers to:
- Selecting the most profitable risks while ceding all others
- The tendency for higher-risk applicants to seek insurance more aggressively than lower-risk ones (Correct answer)
- Intentional misrepresentation by the insured
- Declining coverage in underserved markets
Correct 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.
Question 4: Which reinsurance structure is most commonly used to protect against catastrophic single-event losses such as hurricanes?
- Quota share treaty
- Per-risk excess of loss
- Catastrophe excess of loss (Cat XL) (Correct answer)
- Proportional surplus share
Correct 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.
Question 5: When managing a book of business, 'risk diversification' is valuable because it:
- Eliminates the need for reinsurance
- Reduces the chance that losses across the portfolio will be highly correlated (Correct answer)
- Guarantees a profit in any given year
- Increases the per-policy premium charged
Correct 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.
Question 6: A cedent's 'net retention' in a surplus share treaty is calculated as:
- Total premiums minus ceded premiums
- The maximum dollar amount of each risk the cedent keeps before ceding the surplus to reinsurers (Correct answer)
- The reinsurer's commission paid back to the cedent
- The aggregate limit of the treaty multiplied by the loss ratio
Correct 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.
CU CU Reinsurance and Portfolio Management 2
Which metric best measures the overall profitability of an underwriting portfolio before investment income?