PGI Reinsurance 1

Question 1

What is the primary purpose of reinsurance for a direct insurer?

Accepted Answer

To spread risk, protect against catastrophic losses, and stabilize underwriting results, enabling acceptance of larger risks

Answer

Reinsurance enables direct insurers to spread risk, protect against catastrophic or unusually large losses, stabilize annual financial results, increase capacity to write larger risks, and manage their capital position.

Question 2

What is a 'quota share' reinsurance treaty?

Accepted Answer

A treaty where the cedant cedes a fixed percentage of every risk to the reinsurer, sharing both premiums and losses proportionally

Answer

In a quota share treaty, the cedant cedes a fixed percentage of every risk to the reinsurer. Premiums are shared in the same proportion as losses — if 30% is ceded, the reinsurer receives 30% of premiums and pays 30% of all losses.

Question 3

What is a 'surplus lines' reinsurance treaty?

Accepted Answer

A proportional treaty where the cedant retains a fixed amount and cedes to the reinsurer any amount above that retention, up to an agreed multiple of the retention

Answer

A surplus treaty allows the cedant to retain a fixed amount (one 'line') on each risk and cede the surplus above that retention to the reinsurer, up to an agreed multiple. Larger risks cede more; smaller risks may retain fully.

Question 4

What is 'stop loss' reinsurance?

Accepted Answer

A reinsurance contract that pays when the cedant's total losses for a defined period exceed a stated percentage of earned premium

Answer

Stop loss reinsurance protects the cedant's overall loss ratio for a defined period. The reinsurer pays when total losses exceed a specified percentage of earned premium, protecting the cedant from catastrophic aggregate losses across the portfolio.

Question 5

What is 'catastrophe excess of loss' reinsurance?

Accepted Answer

Reinsurance that pays when an accumulation of losses from a single catastrophic event exceeds the cedant's retention

Answer

Catastrophe excess of loss (Cat XL) reinsurance responds when a single catastrophic event causes an accumulation of losses across the cedant's portfolio that exceeds the agreed retention, providing protection against event-driven accumulation losses.

PGI Insurance Practice Test

PGI Insurance Practice Test

PGI Reinsurance 1