1. What is the definition of reinsurance?

2. Who is the ceding company in a reinsurance arrangement?

3. What is the term used for the amount of insurance retained by the ceding company?

4. What is a cession in the context of reinsurance?

5. What is retrocession in reinsurance?

6. Why do insurers use reinsurance? Name at least two reasons.

7. What are the two principal forms of reinsurance?

8. What is facultative reinsurance?

9. What is the primary advantage of facultative reinsurance?

10. What is a major disadvantage of facultative reinsurance?

11. What is treaty reinsurance?

12. What are the advantages of treaty reinsurance for the primary insurer?

13. Name one disadvantage of treaty reinsurance.

14. What is a quota-share treaty in reinsurance?

15. How do premiums and losses get shared in a quota-share treaty?

16. What is a surplus-share treaty?

17. In a surplus-share treaty, what is the retention limit referred to as?

18. What is the purpose of excess-of-loss reinsurance?

19. What is a reinsurance pool?

20. How do reinsurance pools operate in terms of sharing losses and premiums?

Answer

1. **Definition of reinsurance**: Reinsurance is the shifting of part or all of the insurance originally
written by one insurer to another.

2. **Ceding company**: The primary insurer that initially writes the insurance business.

3. **Retention limit (or net retention)**: The amount of insurance retained by the ceding company for
its own account.
4. **Cession**: The amount of insurance ceded to the reinsurer.

5. **Retrocession**: When the reinsurer in turn reinsures part or all of the risk with another insurer,
this arrangement is known as retrocession.

6. **Reasons for reinsurance**:

- Increase underwriting capacity

- Stabilize profits

- Reduce the unearned premium reserve

- Provide protection against catastrophic loss

7. **Two principal forms of reinsurance**: Facultative and treaty reinsurance.

8. **Facultative reinsurance**: An optional, case-by-case method where the ceding company seeks
reinsurance for individual risks that exceed its retention limit.

9. **Primary advantage of facultative reinsurance**: Flexibility, as a reinsurance contract can be tailored

to fit specific cases.

10. **Major disadvantage of facultative reinsurance**: Uncertainty, as the ceding insurer does not
know in advance if a reinsurer will accept any part of the insurance.

11. **Treaty reinsurance**: An arrangement where the primary insurer agrees to cede, and the
reinsurer agrees to accept, all business that falls within the scope of the agreement automatically.

12. **Advantages of treaty reinsurance for the primary insurer**:

- Automatic coverage, with no uncertainty or delay

- Economical, as there is no need to shop around for reinsurance before writing the policy

13. **Disadvantage of treaty reinsurance**: The reinsurer relies on the primary insurer's underwriting
judgment, which can lead to potential losses if the primary insurer writes bad business or charges
inadequate rates.

14. **Quota-share treaty**: An agreement where the ceding insurer and reinsurer share premiums and
losses based on a fixed percentage.

15. **Sharing premiums and losses in a quota-share treaty**: Both are shared according to the agreed-
upon percentage. For example, if the agreement is 50-50, both premiums and losses are split equally
between the ceding insurer and reinsurer.

16. **Surplus-share treaty**: An arrangement where the reinsurer agrees to accept insurance in excess
of the ceding insurer's retention limit, up to a maximum amount.
17. **Retention limit in a surplus-share treaty**: Referred to as a line, stated as a dollar amount.

18. **Purpose of excess-of-loss reinsurance**: To provide protection against catastrophic losses that
exceed the retention limit.

19. **Reinsurance pool**: An organization of insurers that underwrites insurance on a joint basis to
share large risks that may be beyond the capacity of a single insurer.

20. **Operation of reinsurance pools**:

- Each member agrees to pay a certain percentage of every loss.

- Alternatively, each member is responsible for its own losses below a certain amount, similar to an
excess-of-loss reinsurance treaty.

Multiple Questions

1. **What is reinsurance?**

- A. A method of increasing premiums

- B. Shifting part or all of the insurance originally written by one insurer to another

- C. A type of life insurance

- D. A method to directly insure high-risk individuals

2. **What is the primary insurer in a reinsurance arrangement called?**

- A. Reinsurer

- B. Broker

- C. Ceding company

- D. Underwriter

3. **What term describes the amount of insurance retained by the ceding company?**

- A. Premium

- B. Cession

- C. Retention limit

- D. Reinsurance pool

4. **What is the insurer that accepts part or all of the insurance from the ceding company called?**

- A. Broker
 - B. Reinsurer

- C. Underwriter

- D. Agent

5. **What is the term for the amount of insurance ceded to the reinsurer?**

- A. Retention limit

- B. Cession

- C. Premium

- D. Deductible

6. **What is retrocession in reinsurance?**

- A. The primary insurer accepting more risk

- B. The reinsurer transferring part or all of the risk to another insurer

- C. Increasing the retention limit

- D. Reducing premiums for the insured

7. **Which of the following is NOT a reason for using reinsurance?**

- A. Increase underwriting capacity

- B. Stabilize profits

- C. Reduce customer premiums

- D. Provide protection against catastrophic loss

8. **What are the two principal forms of reinsurance?**

- A. Automatic and facultative

- B. Treaty and facultative

- C. Excess-of-loss and surplus-share

- D. Quota-share and treaty

9. **What characterizes facultative reinsurance?**

- A. It is mandatory for all insurers

 - B. It is an optional, case-by-case method

- C. It covers all policies automatically

- D. It is required by law

10. **Which of the following is a major disadvantage of facultative reinsurance?**

- A. It is automatic

- B. It provides flexibility

- C. It increases capacity

- D. It involves uncertainty and delay

11. **What characterizes treaty reinsurance?**

- A. It is an optional, case-by-case method

- B. It involves no contractual agreement

- C. It automatically covers all business within the scope of the agreement

- D. It is used only for catastrophic losses

12. **Which of the following is an advantage of treaty reinsurance for the primary insurer?**

- A. It is flexible

- B. It involves no uncertainty or delay

- C. It is more expensive than facultative reinsurance

- D. It requires individual underwriting for each policy

13. **What is a disadvantage of treaty reinsurance?**

- A. It involves individual policy negotiations

- B. The reinsurer relies on the primary insurer's underwriting judgment

- C. It is automatic

- D. It stabilizes the insurer's operations

14. **In a quota-share treaty, premiums and losses are shared based on:**

- A. A fixed dollar amount

 - B. A fixed percentage

- C. The reinsurer’s discretion

- D. The primary insurer’s discretion

15. **In a surplus-share treaty, the retention limit is referred to as:**

- A. A line

- B. A cession

- C. A premium

- D. A deductible

16. **Excess-of-loss reinsurance is designed primarily for:**

- A. Stabilizing profits

- B. Increasing premiums

- C. Catastrophic protection

- D. Reducing underwriting capacity

17. **A reinsurance pool is:**

- A. A method of underwriting small risks

- B. An organization of insurers that underwrites insurance on a joint basis

- C. A type of facultative reinsurance

- D. A way to reduce premiums for policyholders

18. **In a quota-share treaty, the ceding insurer's retention limit is stated as:**

- A. A dollar amount

- B. A percentage

- C. A cession

- D. A premium

19. **What is one of the primary purposes of reinsurance pools?**

- A. To insure small, low-risk policies

 - B. To combine financial resources for underwriting large amounts of insurance

- C. To provide facultative reinsurance

- D. To increase premiums for the insured

20. **Which of the following best describes a ceding commission?**

- A. A fee paid by the insured to the primary insurer

- B. A payment from the reinsurer to the primary insurer to help cover expenses

- C. A charge for underwriting services

- D. A percentage of the loss shared with the reinsurer

21. **What does an excess-of-loss treaty cover?**

- A. A single exposure

- B. A single occurrence

- C. Excess losses during a specific time period

- D. All of the above

22. **A major advantage of facultative reinsurance is:**

- A. Automatic coverage

- B. Flexibility to fit specific cases

- C. Guaranteed acceptance by reinsurers

- D. Higher premiums for the primary insurer

23. **A disadvantage of treaty reinsurance is that it can be:**

- A. Unprofitable to the reinsurer

- B. Too flexible

- C. Slow to implement

- D. Limited to small risks

24. **In reinsurance pools, losses are shared:**

- A. Based on the primary insurer's discretion

 - B. Equally among all members

- C. According to each member's agreed percentage

- D. By the reinsurer only

25. **Reinsurance primarily helps insurers to:**

- A. Lower customer premiums

- B. Transfer and spread risk

- C. Avoid underwriting large policies

- D. Increase profits through higher premiums