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Chapter 4 Features and operation of proportional reinsurance treaties 4/29

Question answers

4.1 No, to be homogeneous, risks need to be similar in type, as well as size. It is apparent that there is no
crossover between these two classes of risk.

4.2 Compared with other types of proportional reinsurance arrangements, there is virtually a complete absence of
anti-selection levelled against the reinsurer on the part of the reinsured. Also, the reinsurer has less
administration to perform compared with, say, a surplus arrangement.
4.3 75%, because nine months of the twelve-month period fall during the calendar year.
4.4 An example would be where a fire and property insurer allows its own introductory sources 15% commission
on business received. Instead of ceding 100% of relevant gross premiums to its reinsurers, it cedes only 85%.
4.5 ‘Deficit to extinction’ mitigates a situation where the reinsurer would pay out more profit commission only a
few years after the treaty has sustained a major loss year, which could happen if a deficit is only brought
forward two or three years, and gives the reinsurer the possibility of recouping profits in ensuing years. Such
a situation works to the reinsurer’s advantage.
4.6 1. US$6m as the event loss recovery is restricted up to the event limit which is three times the single risk Chapter
(or cession) limit. 4
2. US$10m.
3. No, the recovery amount would still be US$10m whether the five risks had been affected by separate
losses rather than one ‘event’ or not provided each loss amount remains US$2m. If there was an event
limit of US$6m in place but the five risks had been affected by separate losses rather than one ‘event’,
US$10m could still be recovered provided each loss amount remains US$2m. Reference copy for CII Face to Face Training