PGI Reinsurance 2

Question 1

What is 'retrocession' in reinsurance?

Accepted Answer

When a reinsurer passes on part of the risk it has accepted from a cedant to another reinsurer (the retrocessionnaire)

Answer

Retrocession is when a reinsurer purchases reinsurance for itself from another reinsurer (the retrocessionnaire), passing on part of the risk it has assumed from its cedants. It is essentially reinsurance of reinsurance.

Question 2

What is 'loss reserve development' and why is it important in reinsurance?

Accepted Answer

The process by which initial estimates of claims costs change over time as actual costs become clearer, affecting reinsurance recoveries

Answer

Loss reserve development refers to how initial claims estimates change as additional information emerges, claims develop, or legal proceedings conclude. In long-tail reinsurance, reserve development can significantly affect the actual reinsurance recoveries eventually received.

Question 3

What is the 'follow the fortunes' doctrine in reinsurance?

Accepted Answer

The reinsurer is bound by the cedant's good faith claims decisions and must pay its share of agreed losses without independent review

Answer

The 'follow the fortunes' doctrine means the reinsurer shares the cedant's fate and is bound by the cedant's bona fide business decisions on claims settlement, subject to the cedant acting in good faith within the terms of the original policy.

Question 4

What is 'finite reinsurance' and why has it attracted regulatory scrutiny?

Accepted Answer

A form of reinsurance with limited risk transfer, often used for financial engineering purposes, which regulators scrutinize to ensure genuine risk is transferred

Answer

Finite reinsurance involves limited risk transfer and often has significant financial engineering components. Regulators have scrutinized it to ensure genuine insurance risk is transferred, rather than being used purely to smooth accounting results.

Question 5

What is 'aggregate extension clause' in a catastrophe reinsurance treaty?

Accepted Answer

A clause that allows losses from multiple smaller events to be aggregated to satisfy the excess point of a catastrophe treaty

Answer

An aggregate extension clause allows the cedant to aggregate losses from multiple smaller events occurring within a specified timeframe to satisfy the attachment point of the catastrophe excess of loss treaty.

PGI Insurance Practice Test

PGI Insurance Practice Test

PGI Reinsurance 2