6. Reinsurance and Risk-Transfer Accounting

Introduction and context

Insurance enables individuals and organisations to transfer the financial consequences of uncertain events to an insurer. The insurer, however, remains exposed to concentration, catastrophe, accumulation and frequency risks. Reinsurance is the contractual mechanism through which an insurer transfers part of those risks to another insurer, known as the reinsurer. The original insurer is the cedant, and the business transferred is ceded business. A reinsurer may itself transfer part of the assumed risk through retrocession.

Reinsurance is therefore more than a financing arrangement. It is a central instrument of capital management, underwriting capacity, solvency protection and earnings stabilisation. Its accounting, however, requires careful judgment. The cedant must distinguish between genuine risk transfer and arrangements that primarily provide financing or deposit-taking. It must also recognise premiums, commissions, claims recoveries, reinstatement premiums, receivables and impairment risks in a manner consistent with the contractual substance and the applicable reporting framework.

This chapter examines the accounting and management of proportional and non-proportional reinsurance. It links journal entries and financial statement presentation with the wider questions of risk transfer, counterparty credit risk, collectability and programme effectiveness. Although detailed requirements vary by jurisdiction and reporting standard, the underlying principles are broadly applicable to insurance organisations.

Learning objectives

After studying this chapter, students should be able to:

1. Explain the purpose, structure and terminology of reinsurance and retrocession.

2. Distinguish proportional from non-proportional reinsurance and identify their principal forms.

3. Account for ceded premiums, commissions, recoverables, reinstatement premiums and related balances.

4. Assess whether a contract transfers significant insurance risk.

5. Evaluate counterparty credit risk, collectability and collateral arrangements.

6. Analyse the effectiveness of a reinsurance programme using financial and risk measures.

7. Identify governance, regulatory, ethical and operational issues in reinsurance accounting.

The economic architecture of reinsurance

A reinsurance contract normally involves an insurer transferring specified insurance risks arising from policies it has issued. The contract may cover a portfolio, a class of business, a catastrophe zone or an individual large risk. The cedant continues to have the primary relationship with the policyholder. Unless the policyholder has a direct right against the reinsurer, the reinsurer’s obligation is generally to the cedant rather than directly to the insured.

Reinsurance serves several connected purposes. First, it increases underwriting capacity by allowing an insurer to write risks larger than its own capital or retention limits would permit. Second, it reduces volatility by absorbing unusually large losses or an accumulation of claims. Third, it can support solvency and capital efficiency, although regulatory recognition depends on the quality and enforceability of the arrangement. Fourth, it gives the insurer access to specialist underwriting knowledge and international diversification.

The cedant’s retention is the amount or proportion of risk it keeps for its own account. The reinsurance limit is the maximum amount payable by the reinsurer under the treaty or contract. A programme normally combines several layers, each responding to a different level of loss. For example, an insurer may retain ordinary claims, purchase a per-risk excess-of-loss layer, and add catastrophe protection above it.

Reinsurance documentation may contain a treaty, covering an agreed portfolio, or facultative placement, negotiated for an individual risk. Treaty reinsurance is efficient for recurring business but may expose the insurer to portfolio-wide deterioration. Facultative reinsurance permits more precise risk selection but is administratively intensive and may be unavailable after a loss.

Proportional reinsurance: sharing premium and loss

Under proportional reinsurance, the reinsurer receives an agreed share of premium and pays the same share of covered losses, subject to contract terms. The principal forms are quota share and surplus share.

In quota-share reinsurance, the reinsurer assumes a fixed percentage of every policy within the defined class. If the quota is 40 per cent, the reinsurer generally receives 40 per cent of the relevant premium and bears 40 per cent of covered claims. Quota share is straightforward and provides broad protection, but it transfers profitable as well as unprofitable business. It may therefore be expensive when the cedant has strong underwriting performance.

Surplus-share reinsurance is based on lines. The cedant retains a stated number of lines, and the reinsurer accepts the surplus up to a specified limit. A line is commonly related to the cedant’s retention on a risk. The ceded percentage therefore varies between policies. Surplus arrangements are useful when policy sizes differ materially and the insurer wishes to retain smaller risks while obtaining capacity for larger ones.

Proportional contracts often include ceding commissions. The reinsurer pays the cedant a commission intended to compensate for acquisition costs, administration and underwriting services. A commission may be fixed, variable, sliding-scale or profit-based. Accounting should reflect the contractual entitlement and the applicable insurance measurement model; a commission is not automatically equivalent to revenue or profit because it may represent reimbursement of acquisition expenditure or adjustment of the net cost of reinsurance.

Illustrative entry: assume a cedant writes premium of CU 10 million and cedes 40 per cent under a quota-share treaty. The ceded premium is CU 4 million. If the reinsurer pays a 25 per cent ceding commission, the commission is CU 1 million.

A simplified presentation may record:

• Debit reinsurance service expense or ceded premium: CU 4 million
• Credit reinsurance payable: CU 4 million
• Debit reinsurance receivable: CU 1 million
• Credit reinsurance commission income or reduction of ceded cost: CU 1 million

The exact classification depends on the reporting standard, contract terms and whether the commission relates to service expenses, acquisition cash flows or another component of the reinsurance contract. The essential control is that ceded premium, commission, underlying gross business and reinsurance balances reconcile to bordereaux and contract terms.

Non-proportional protection: attaching to loss severity

Non-proportional reinsurance responds when losses exceed a specified attachment point. It does not normally share each premium and claim in a fixed percentage. Its price is generally based on expected loss, exposure, catastrophe modelling, market conditions and the reinsurer’s required return.

Per-risk excess-of-loss reinsurance protects the cedant against a large loss on one insured risk. If the retention is CU 5 million and the layer is CU 10 million excess of CU 5 million, a covered loss of CU 12 million produces a recovery of CU 7 million, subject to exclusions and other terms. The cedant retains CU 5 million and the reinsurer pays CU 7 million.

Catastrophe excess-of-loss reinsurance responds to the aggregation of losses from one event, such as a storm, earthquake or industrial accident affecting many policies. If the retention is CU 50 million and the layer is CU 100 million excess of CU 50 million, an event loss of CU 130 million generates a recovery of CU 80 million. Event definitions, hours clauses, geographical limits and loss-occurrence provisions are particularly important.

Aggregate excess-of-loss cover responds when cumulative losses during a period exceed an aggregate attachment point. It is useful for protecting annual results against unusually high frequency, although it may be subject to an aggregate limit and a loss ratio threshold.

Stop-loss reinsurance protects the cedant when losses exceed a specified percentage of earned premium or another measure over a period. It is often used to stabilise an underwriting result rather than to protect a single event. Its operation requires careful attention to premium bases, incurred-loss definitions, development periods and exclusions.

Under non-proportional contracts, the cedant recognises the premium payable for protection and recognises recoveries when the contractual recovery right arises or when the applicable measurement model requires recognition based on expected cash flows. A recovery should not be recorded merely because management expects a loss; the loss must fall within the contract and the recovery must be measurable and enforceable.

Risk transfer and the substance of the contract

The central accounting question is whether the arrangement transfers significant insurance risk. Insurance risk arises when an insured event could cause the reinsurer to make additional payments because the event is uncertain in amount or timing. A contract that merely guarantees repayment of a known amount, provides financing, or limits the reinsurer’s economic exposure may fail the risk-transfer test.

Assessment normally considers:

• the nature and variability of the underlying insured events;
• the size and timing of potential recoveries compared with premiums;
• exclusions, caps, corridors and experience accounts;
• whether the reinsurer can be required to pay under adverse outcomes;
• cancellation and commutation rights;
• collateral and funds-withheld arrangements; and
• whether the cedant retains substantially all risks and rewards.

Risk transfer is a contract-level judgment, not simply a conclusion based on the label “reinsurance”. A contract may transfer underwriting risk but contain embedded financing features. Conversely, a contract with a relatively predictable expected loss may still transfer significant risk if an adverse but plausible event creates a substantial payment obligation for the reinsurer.

The evaluation should be performed at inception and revisited when contract terms change or circumstances indicate that the original assessment may no longer be appropriate. Documentation should explain the economic rationale, stress scenarios, probability-weighted outcomes and the effect of contractual limits.

Accounting for reinsurance held

Modern insurance reporting frameworks generally require separate accounting for reinsurance held and the underlying insurance contracts issued. Reinsurance recoverables are not simply deducted from gross insurance liabilities in all circumstances. The financial statements should show the nature of the cedant’s rights, obligations and exposure to the reinsurer.

Important components may include:

1. ceded premiums or the consideration paid for reinsurance;

2. ceding commissions and other contractual cash flows;

3. expected recoveries of claims and benefits;

4. reinsurance contract assets or liabilities arising from measurement models;

5. amounts due from or payable to reinsurers;

6. reinstatement premiums; and

7. impairment or expected credit loss adjustments.

A useful operational distinction is between gross claims, ceded claims and net claims. Gross claims represent the obligation to policyholders. Ceded claims represent amounts expected from reinsurers. Net claims reflect the cedant’s retained cost, but net presentation must not obscure the fact that the cedant remains liable to policyholders even if the reinsurer defaults.

Suppose gross incurred claims are CU 30 million and a valid treaty provides an expected recovery of CU 12 million. The cedant may record a reinsurance recoverable of CU 12 million and a net claims cost of CU 18 million, subject to the applicable standard. If CU 2 million of the recovery is doubtful because of counterparty deterioration, the recoverable must be reduced or an impairment allowance recognised. The gross policyholder liability remains CU 30 million.

Recoverables should be reconciled by underwriting year, treaty, claim reference, currency, attachment point and payment status. Long-outstanding balances require specific investigation. A large recoverable is not necessarily a strong asset: its value depends on enforceability, timing, counterparty capacity and the evidence supporting the claim.

Reinstatement premiums and contract layers

A reinstatement provision allows a reinsurance limit used by a loss to be restored for subsequent losses during the contract period. The cedant may pay an additional premium, often calculated pro rata as to amount and time, although some reinstatements may be free or subject to special terms.

For example, a CU 20 million catastrophe layer is exhausted by a covered event. The contract permits one reinstatement at an additional premium of CU 3 million. If a second event occurs after the reinstatement is purchased, the cedant may claim under the restored limit. Accounting must identify when the reinstatement right is triggered, when the premium becomes payable and whether the premium relates to the original protection, the restored coverage or a separate contractual component.

Common errors include recognising a reinstatement premium before the contractual trigger occurs, ignoring reinstatement provisions in pricing analysis, or failing to allocate a recovery correctly between original and reinstated limits. Claims systems and treaty administration systems should track exhaustion, partial erosion, reinstatement status and remaining aggregate capacity.

Retrocession and the reinsurance chain

Retrocession is reinsurance purchased by a reinsurer. It spreads concentration further through the market and may protect a reinsurer’s capital from catastrophe accumulation or large individual losses. From the retroceding reinsurer’s perspective, the accounting issues resemble those of a primary cedant: ceded premium, retrocession recoverables, commissions, collateral, reinstatement premiums and counterparty impairment.

Retrocession can create basis risk. The reinsurer’s obligation to its cedant may not match the protection available from its retrocessionaire because of different exclusions, attachment points, currencies or event definitions. A reinsurer may therefore face a claim from its cedant while being unable to recover fully under its own retrocession. Effective risk management must analyse the entire chain rather than assuming that risk transferred outward is eliminated.

Counterparty credit risk and collectability

Reinsurance substitutes underwriting concentration with counterparty exposure. The principal risk is that the reinsurer cannot or will not pay when a claim becomes due. Credit risk may arise from insolvency, dispute, delayed documentation, sanctions, currency restrictions, legal uncertainty or deterioration in financial strength.

Credit assessment should combine external information with internal analysis. Relevant factors include financial strength ratings, capital adequacy, liquidity, claims-paying history, jurisdiction, business model, retrocession dependence, collateral quality and concentration of exposures. Ratings are useful but not conclusive. A highly rated counterparty can still default, and a rating may change after a catastrophe when the cedant most needs payment.

Collectability analysis should be performed at inception, reporting date and whenever a material event occurs. Expected cash flows should reflect probability-weighted outcomes, timing, dispute risk and collateral realisation. A recoverable may require an impairment allowance even when the contractual claim is valid. Conversely, a temporary delay should not automatically be treated as a permanent credit loss if credible evidence supports eventual collection.

Collateral may take the form of letters of credit, trust accounts, funds withheld, cash deposits or guarantees. Its value depends on legal enforceability, eligibility, liquidity, control and the possibility of competing claims. Collateral does not remove all risk; it may introduce investment, concentration, operational and legal risks.

Evaluating programme effectiveness

A reinsurance programme should be assessed as a risk-management portfolio rather than by premium cost alone. The following measures are useful:

• net-to-gross loss ratio, showing the degree of retained claims cost;
• net income volatility before and after reinsurance;
• capital relief and solvency impact;
• exhaustion probability for each layer;
• reinstatement frequency and remaining limit;
• recoverable concentration by counterparty and jurisdiction;
• ceded premium as a proportion of gross premium;
• collection period and disputed-recoverable ratio; and
• return on capital after reinsurance cost.

Scenario analysis is particularly important. Management should test ordinary deterioration, one major event, multiple events, inflation, claims development, reinsurer default and simultaneous collateral impairment. A programme may appear efficient under expected losses but fail under a clustered catastrophe or when several counterparties are affected by the same event.

The optimal programme balances retention and transfer. Excessive retention may produce unacceptable earnings and capital volatility. Excessive transfer may erode profitability, create dependence on external capacity and weaken underwriting discipline. The decision should reflect risk appetite, capital strength, catastrophe exposure, pricing conditions and strategic objectives.

Governance, regulation and professional judgment

Reinsurance decisions require clear accountability among underwriting, actuarial, finance, claims, legal, treasury and risk functions. The board or an appropriate committee should approve risk appetite, retention limits, counterparty standards and aggregate exposures. Material contracts should undergo legal review, particularly where wording is complex or governing law differs from the cedant’s jurisdiction.

Regulators commonly expect adequate documentation of reinsurance arrangements, effective risk transfer, counterparty quality, collateral, concentration and recoverables. Reinsurance should not be used to create artificial solvency, conceal adverse experience or shift losses temporarily between reporting periods. Side letters, undisclosed commissions, informal understandings and circular transactions threaten both accounting integrity and regulatory compliance.

Ethical practice requires fair disclosure of material exposures, transparent treatment of disputed claims and avoidance of conflicts in placement and brokerage. An intermediary’s remuneration should be understood, recorded and governed. Management must resist pressure to recognise recoveries prematurely or to select assumptions that produce an unjustified capital benefit.

Technology, data and emerging practice

Reinsurance accounting is highly dependent on data quality. Treaty-management platforms can store contract wording, limits, attachments, reinstatements, premiums, claims and bordereaux. Automated validation can compare policy and claim data with treaty definitions, identify missing fields and flag potential breaches of limits.

Analytics and catastrophe models support pricing, accumulation management and scenario testing. Machine-learning tools may identify unusual claims patterns, duplicate recoveries or delayed settlements, but model outputs require governance, validation and human review. Natural-language processing can assist in extracting clauses from contracts, yet ambiguous wording should be reviewed by qualified legal and underwriting professionals.

Contemporary practice increasingly emphasises real-time exposure data, alternative capital, collateralised reinsurance, parametric covers and climate-related scenario analysis. Parametric arrangements pay when an objectively measured trigger is reached, such as wind speed or earthquake intensity. They can provide rapid liquidity but may create basis risk because the payment trigger may not equal the cedant’s actual loss. This distinction is important for both programme design and accounting assessment.

Illustrative case study: catastrophe treaty and counterparty stress

Background

Harbor Mutual, a fictional regional property insurer, writes commercial and household property risks in a coastal territory. Its gross annual premium is CU 240 million. It retains CU 10 million per risk and purchases a catastrophe excess-of-loss programme of CU 80 million excess of CU 20 million, with one paid reinstatement. The programme is placed with three reinsurers.

Situation

A severe storm produces gross insured losses of CU 115 million. Claims are expected to develop over eighteen months. The catastrophe treaty therefore appears to provide a recovery of CU 80 million, leaving CU 35 million before other adjustments. One reinsurer, responsible for 30 per cent of the layer, is placed under regulatory supervision after the event. Its rating falls sharply, and CU 6 million of its estimated recovery is considered doubtful.

Analysis

The finance function first validates the event definition, occurrence period, geographical scope, attachment point and remaining limit. It then calculates the contractual recovery by reinsurer and distinguishes reported claims from incurred-but-not-reported estimates. The expected recovery is recognised only for losses within the treaty and supported by reasonable measurement evidence.

The gross policyholder liability remains CU 115 million. The estimated reinsurance recovery is CU 80 million, but the expected credit loss or impairment associated with the stressed reinsurer must be considered. If CU 6 million is not expected to be collected, the recognised net recovery is CU 74 million, subject to the reporting framework. The insurer must not reduce its gross liability merely because a recovery is expected.

The risk function also tests whether the second event would be protected after the paid reinstatement, calculates the additional premium, and examines the effect of inflation on the remaining limit. Treasury assesses collateral and liquidity. Legal advisers review the distressed reinsurer’s obligations and the enforceability of claims documentation.

Approach and outcome

Harbor Mutual establishes a treaty-level recoverables register, accelerates claims bordereaux, obtains confirmation from each reinsurer, and records an impairment allowance for the doubtful balance. It discloses significant counterparty concentration and uncertainty in loss development. For the next renewal, it retains the same catastrophe attachment but diversifies the panel, increases collateral requirements and introduces clearer event and claims-cooperation wording.

The programme protects Harbor Mutual from the severity of the storm, but it does not eliminate risk. The insurer still bears the retention, timing risk, reinstatement cost, basis risk and counterparty credit risk.

Learning points

1. A contractual recovery and a collectible recovery are not always identical.

2. Gross policyholder obligations continue even when reinsurance is available.

3. Catastrophe programmes must be tested for reinstatement and accumulation effects.

4. Counterparty diversification is part of programme design, not merely a finance exercise.

5. Claims, actuarial, legal, finance and risk teams must work from consistent data and wording.

Common errors and control practices

Frequent errors include confusing ceded premium with ceded claims, failing to recognise ceding commissions correctly, overlooking aggregate limits, recording recoveries before contractual attachment, and ignoring currency or timing differences. Other weaknesses arise when treaty terms are stored only in spreadsheets, when bordereaux are not reconciled, or when finance relies on broker statements without independent validation.

Strong practice includes a central contract inventory, controlled treaty master data, maker-checker approval for calculations, independent confirmation of significant balances, ageing of recoverables, documented impairment methodology, and post-event review. Accounting policies should explain recognition, measurement, presentation and disclosure decisions. Programme effectiveness should be reviewed annually and after major claims or changes in capital strategy.

Chapter Summary

Reinsurance transfers part of an insurer’s insurance risk to a reinsurer and supports capacity, solvency and earnings stability. Proportional contracts share premium and losses, while non-proportional contracts respond above specified attachments or aggregate thresholds. Ceding commissions, reinstatement premiums, claims recoveries and retrocession must be accounted for according to contractual substance and the applicable reporting framework.

The existence of a reinsurance contract does not by itself prove significant risk transfer or collectability. Assessment must consider exclusions, limits, financing features, enforceability and adverse scenarios. Reinsurance recoverables remain exposed to counterparty credit risk, and the cedant remains responsible to policyholders even when recoveries are expected. Effective programmes balance retention, cost, capital relief, volatility, coverage quality and counterparty strength. Robust governance, reliable data, automation with human oversight and transparent disclosure are essential to sound reinsurance accounting.

Key Terms

Risk transfer: The shifting of significant insurance risk from one party to another through a contract.

Cedant: The insurer that transfers insurance risk to a reinsurer.

Reinsurer: An insurer that accepts insurance risk from another insurer.

Retrocession: Reinsurance purchased by a reinsurer.

Retention: The portion of risk or loss kept for the cedant’s own account.

Ceded premium: Premium attributable to insurance business transferred to a reinsurer.

Ceding commission: Compensation paid by a reinsurer to a cedant under a proportional contract.

Quota share: Proportional reinsurance covering a fixed percentage of each eligible policy.

Surplus share: Proportional reinsurance based on the portion of a risk exceeding the cedant’s retained lines.

Excess of loss: Non-proportional reinsurance responding to losses above an attachment point.

Attachment point: The loss level above which a non-proportional reinsurance layer begins to respond.

Limit: The maximum amount payable under a reinsurance layer or contract.

Catastrophe cover: Reinsurance protecting against accumulated losses from one defined event.

Aggregate excess of loss: Cover responding when cumulative losses exceed a specified threshold.

Stop-loss cover: Reinsurance protecting an underwriting result above a specified loss level or ratio.

Reinsurance recoverable: An amount expected to be collected from a reinsurer for covered losses or benefits.

Reinstatement premium: Additional premium paid to restore reinsurance capacity after a covered loss.

Counterparty credit risk: The risk that a reinsurer will fail to perform its contractual payment obligation.

Basis risk: The risk that reinsurance protection does not correspond closely to the cedant’s actual loss.

Funds withheld: Amounts retained by the cedant, often as security for obligations owed by the reinsurer.

Review Questions

Short Answer Questions

1. What is the difference between a cedant and a reinsurer?

2. Explain the main distinction between proportional and non-proportional reinsurance.

3. What is a ceding commission?

4. Why does the cedant’s gross liability to policyholders remain after recognising a reinsurance recoverable?

5. Define reinstatement premium.

Long Answer Questions

1. Explain quota-share and surplus-share reinsurance, including their accounting implications.

2. Describe the principal forms of non-proportional reinsurance and the risks each is designed to address.

3. Discuss the factors used to assess significant risk transfer in a reinsurance contract.

4. Explain how counterparty credit risk and collectability affect the measurement of reinsurance recoverables.

5. Evaluate the governance and control requirements for an effective reinsurance accounting process.

Analytical / Application Questions

1. An insurer has gross claims of CU 50 million and an expected treaty recovery of CU 18 million. The reinsurer’s financial condition suggests that CU 3 million may not be collectible. Explain the accounting and risk-management issues that arise.

2. A catastrophe layer covers CU 60 million excess of CU 20 million. An event produces covered losses of CU 70 million and triggers a paid reinstatement. Calculate the initial recovery before other contractual adjustments and identify the issues management should examine before recognising a second-event recovery.

3. Compare two programmes: Programme A has a low retention but high ceded premium and concentrated counterparties; Programme B has a higher retention, lower cost and diversified reinsurers. Recommend the analytical factors management should use before selecting a programme.

22. Multiple Choice Questions with Answers

Question 1

Under a 40% quota-share treaty, which statement is generally correct?

A. The reinsurer shares 40% of eligible premium and covered losses

B. The reinsurer pays only losses exceeding the cedant’s retention

C. The cedant transfers only catastrophe losses

D. The reinsurer receives no premium until a claim occurs

Correct Answer: A. The reinsurer shares 40% of eligible premium and covered losses

Question 2

A per-risk excess-of-loss contract has a retention of CU 5 million. A covered loss is CU 12 million. Ignoring limits and exclusions, what is the reinsurer’s recovery?

A. CU 5 million

B. CU 7 million

C. CU 12 million

D. Zero

Correct Answer: B. CU 7 million

Question 3

Which factor most directly challenges the conclusion that a contract transfers significant insurance risk?

A. The contract covers a diversified portfolio

B. The contract contains a substantial payment obligation for the reinsurer under adverse outcomes

C. The arrangement primarily guarantees repayment of a known amount

D. The reinsurer is independently rated

Correct Answer: C. The arrangement primarily guarantees repayment of a known amount

Question 4

Why must a reinsurance recoverable be assessed for impairment?

A. Because all reinsurance contracts are financing contracts

B. Because the reinsurer may fail to pay even when the contractual claim is valid

C. Because gross policyholder liabilities are eliminated

D. Because proportional treaties never create assets

Correct Answer: B. Because the reinsurer may fail to pay even when the contractual claim is valid

Question 5

What is the primary purpose of a reinstatement provision?

A. To cancel the original reinsurance contract after a loss

B. To restore some or all of a reinsurance limit after it has been used

C. To convert non-proportional cover into quota share

D. To transfer counterparty risk to the policyholder

Correct Answer: B. To restore some or all of a reinsurance limit after it has been used

Question 6

A reinsurer purchases protection for risks it has accepted. This transaction is called:

A. Coinsurance

B. Retrocession

C. Facultative underwriting

D. Salvage

Correct Answer: B. Retrocession

Question 7

Which statement best describes the cedant’s position when a reinsurance recoverable is recognised?

A. The cedant is no longer liable to policyholders

B. The gross policyholder liability generally remains, although a separate recovery asset may be recognised

C. The recoverable is always netted against the policyholder liability

D. The reinsurer becomes the policyholder’s insurer in every case

Correct Answer: B. The gross policyholder liability generally remains, although a separate recovery asset may be recognised

Question 8

Which measure is most useful for assessing whether a programme reduces earnings volatility?

A. The number of policies issued only

B. Net loss volatility compared with gross loss volatility

C. The number of brokers used

D. The face value of policy documents

Correct Answer: B. Net loss volatility compared with gross loss volatility

Question 9

Why can collateral fail to eliminate counterparty risk?

A. Collateral has no accounting relevance

B. Its value may depend on legal enforceability, liquidity and control

C. Collateral always increases claims

D. Collateral cannot be used in reinsurance

Correct Answer: B. Its value may depend on legal enforceability, liquidity and control

Question 10

A catastrophe treaty has a retention of CU 50 million and a limit of CU 100 million. An event loss is CU 130 million. Ignoring other terms, what is the expected recovery?

A. CU 30 million

B. CU 50 million

C. CU 80 million

D. CU 100 million

Correct Answer: C. CU 80 million