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ii M97/February 2018 Reinsurance

Chapter 2 self-test answers

1. Three from:
• where additional capacity is needed;
• where the risk is excluded from the insurer’s treaty arrangements;
• where the original risk is ultra-hazardous;
• where the insurer does not wish to expose its treaty reinsurer to the risk;
• where there are unique commercial, financial or strategic reasons.
• where the insurer is new to a particular market segment, the reinsurer may not offer a treaty
facility until it is confident that the insurer’s underwriters are competent in the disciplines
concerned.

2. Three from:
• uncertainty;
• costly administration;
• delays in issuing policy documentation;
• disclosure of information;
• undue influence of reinsurer;
• loss of control.
3. Three from:
• automatic cover;
• contribution to costs;
• profit commission potential;
• ease of administration; Reference copy for CII Face to Face Training
• simplified accounting procedures;
• computer technology.
4. Proportional reinsurance is where an insurer cedes a proportion of a risk. The reinsurer accepts that
share in the risk, a similar share of the premium and pays the same proportion of the claim.
Non-proportional reinsurance is based on the size of the loss and not the reinsurer’s share in the
risk.
5. Reinsurance is purchased by an insurer from a reinsurer. However, retrocession is a transaction
whereby a reinsurer cedes or passes to another reinsurer all or part of the reinsurance it has itself
assumed.
6. ART has become increasingly important as another method of transferring risk apart from the
purchase of conventional reinsurance. The word ‘alternative’ reflects the possibility of a choosing
different risk management tools. Examples of ART include:
• derivatives;
• multi-trigger policies;
• catastrophe bonds;
• contingent capital contracts;
• industry loss warranties (ILWs);
• reinsurance sidecars; and
• catastrophe futures.

7. CATEX is an electronic system where insurers can trade insurance risk and reduce their exposure to
large losses caused by catastrophes.