10. Reinsurance, Risk Transfer and Complex Transactions

Introduction and Context

Insurance is often described as a mechanism for transferring risk from an insured to an insurer. Yet the insurer itself remains exposed to accumulation, catastrophe, credit, underwriting and liquidity risks. Reinsurance provides the second layer of risk transfer through which an insurer, known as the cedant or ceding insurer, transfers part of its portfolio or individual exposures to a reinsurer. The reinsurer may in turn transfer some of its assumed risks to another reinsurer through retrocession.

Reinsurance is therefore not merely a financial arrangement. It is a legally structured relationship involving allocation of risk, disclosure, claims cooperation, premium and recovery obligations, regulatory capital, sanctions compliance and cross-border enforcement. Complex transactions such as fronting arrangements, captives, catastrophe bonds and collateralised reinsurance extend the traditional insurance model and require careful analysis of both legal form and economic substance.

This chapter examines the principal forms of reinsurance, the duties of cedants and reinsurers, the operation of important contractual clauses, and the regulatory and practical problems that arise in complex and international transactions.

Learning Objectives

After studying this chapter, the learner should be able to:

1. Distinguish facultative, treaty, proportional and non-proportional reinsurance.

2. Explain the principal duties of cedants and reinsurers.

3. Interpret follow-the-fortunes and follow-the-settlements provisions.

4. Analyse reinsurance recoveries, collateral, fronting and retrocession.

5. Evaluate captives and alternative risk-transfer mechanisms.

6. Identify legal, regulatory, governance and ethical risks in complex transactions.

7. Assess issues of jurisdiction, applicable law and cross-border enforceability.

8. Apply these principles to professional and managerial decision-making.

1. The Architecture of Reinsurance

1.1 Parties and contractual relationships

The original policyholder contracts with the primary insurer. The primary insurer then enters into a separate reinsurance contract with a reinsurer. Ordinarily, the policyholder has no direct contractual rights against the reinsurer. This principle is commonly described as the doctrine of privity, although legislation, policy wording, insolvency rules or express cut-through provisions may create exceptions.

The cedant remains responsible to the policyholder under the original insurance contract. Reinsurance does not normally discharge the insurer from its primary obligation to investigate and pay valid claims. It instead creates a right of recovery against the reinsurer, subject to the terms of the reinsurance contract.

A broker may arrange the transaction, advise on placement and communicate information, but the broker’s authority must be carefully defined. Questions may arise concerning whether the broker acts for the cedant, the reinsurer, or both; whether premium payment to the broker constitutes payment to the reinsurer; and whether information given to the broker is legally communicated to the reinsurer.

1.2 Facultative and treaty reinsurance

Facultative reinsurance is negotiated separately for an individual risk or a clearly defined exposure. The reinsurer assesses the risk before accepting it and may accept, reject or modify the proposed terms. Facultative cover is suitable for unusually large, hazardous or specialised risks that fall outside the cedant’s ordinary treaty arrangements. Its disadvantages include transaction cost, slower placement and the possibility that capacity will not be available when needed.

Treaty reinsurance is an arrangement under which the reinsurer agrees in advance to accept risks falling within an agreed class or portfolio. The cedant generally has an obligation to cede qualifying risks, and the reinsurer has a corresponding obligation to accept them. Treaty reinsurance offers operational efficiency and portfolio protection, but the reinsurer must rely heavily on the cedant’s underwriting and claims systems.

Treaties may be automatic, facultative-obligatory or contain reporting and bordereau requirements. The legal effect of a treaty depends on its wording. A document called a “treaty” may still require further agreement before a risk is covered, while an apparently informal arrangement may create binding obligations if its essential terms and intention to contract are established.

1.3 Proportional and non-proportional structures

Under proportional reinsurance, premiums and losses are shared according to an agreed percentage. In quota-share reinsurance, the reinsurer assumes a fixed proportion of every risk within the treaty. In surplus-share reinsurance, the cedant retains a specified amount and cedes the surplus, subject to a stated number of lines. Proportional treaties may provide commissions to the cedant, including profit commissions based on portfolio performance.

Non-proportional reinsurance responds when losses exceed a specified attachment point. In excess-of-loss cover, the reinsurer pays losses above the cedant’s retention up to a stated limit. Per-risk excess-of-loss protects against large individual claims; catastrophe excess-of-loss protects against accumulations arising from one event; and aggregate excess-of-loss responds when total losses during a period exceed an agreed threshold.

The distinction is commercially important. Proportional cover supports capacity, premium income and portfolio sharing, while non-proportional cover is principally a tool for controlling volatility and protecting capital. A cedant may combine both forms, but the interaction between layers, exclusions, reinstatements and event definitions must be analysed carefully.

2. Legal Duties and the Allocation of Information

2.1 Utmost good faith and fair presentation

Insurance and reinsurance relationships have traditionally been associated with utmost good faith. Modern statutes in many jurisdictions have modified the traditional doctrine, replacing broad disclosure obligations with more precise standards such as fair presentation of the risk. The applicable legal rule depends on governing law and the parties’ status.

At placement, the cedant should disclose material facts concerning underwriting standards, loss experience, reserves, aggregation, changes in exposure and known circumstances likely to produce claims. A material fact is generally one that would influence a prudent reinsurer in deciding whether to accept the risk or on what terms. Deliberate concealment, reckless misrepresentation or serious non-disclosure may entitle the reinsurer to avoid or limit the contract, subject to applicable law and contractual remedies.

The duty is not necessarily exhausted when the contract is signed. Changes in risk, new claims information, deterioration of loss experience and material amendments to the underlying business may trigger continuing disclosure or notification obligations.

2.2 The cedant’s operational duties

The cedant is normally expected to:

• underwrite risks consistently with the treaty’s scope and underwriting guidelines;
• maintain accurate records and provide reports or bordereaux;
• pay premiums and other amounts when due;
• notify claims and potential losses within contractual time limits;
• cooperate in claims investigation and settlement;
• preserve documents and permit audit where agreed; and
• comply with sanctions, licensing, data-protection and other regulatory requirements.

A breach does not automatically release the reinsurer from every obligation. The consequences depend on the wording, causation, materiality and applicable law. Some clauses make timely notice a condition precedent; others require the reinsurer to show prejudice before reducing or refusing recovery.

2.3 The reinsurer’s duties

The reinsurer must perform according to the contract, pay valid recoveries within the agreed period and exercise contractual rights honestly and consistently. It should assess claims in a timely manner, maintain adequate financial resources and avoid using audit or information rights merely to delay payment.

Reinsurers also have governance responsibilities. They must understand the risks assumed, monitor accumulation, manage retrocession, maintain appropriate capital and comply with supervisory requirements. A reinsurer’s financial strength is commercially significant because a legally valid recovery is of little practical value if the reinsurer cannot pay.

2.4 Claims cooperation and claims control

Claims cooperation clauses require the cedant to notify the reinsurer and provide information, while leaving the cedant with primary control of the claim. Claims control clauses give the reinsurer a stronger role, sometimes including the right to associate in or control negotiation and settlement. Their interpretation depends on precise language and the parties’ conduct.

The cedant should not assume that a reinsurer’s participation permits the reinsurer to dictate settlement beyond the contractual authority granted. Conversely, a cedant that settles a claim without giving required notice may jeopardise its recovery. Practical claims protocols should identify notification thresholds, experts, authority limits, privileged information and settlement approval procedures.

3. Follow-the-Fortunes and Follow-the-Settlements

A follow-the-fortunes clause generally requires the reinsurer to follow the cedant’s underwriting fortunes, subject to the reinsurance contract. It is intended to prevent the reinsurer from reopening every underwriting judgment made by the cedant. A follow-the-settlements clause is narrower or more specifically directed to claims settlements and may require the reinsurer to honour a settlement made by the cedant if it falls within the original policy and was handled honestly, reasonably and in substantial conformity with the reinsurance terms.

These clauses do not usually convert reinsurance into automatic payment of every amount paid by the cedant. Common limitations include:

1. The loss must fall within the scope of the reinsurance.

2. The cedant must act honestly and not collusively.

3. The settlement must be commercially reasonable or within the underlying policy coverage, depending on wording.

4. The cedant must comply with notice, cooperation and allocation provisions.

5. Exclusions, limits, retentions and aggregation rules remain effective.

A central issue is whether the reinsurer may challenge the cedant’s interpretation of the underlying policy. Courts and arbitral tribunals approach this through the wording and commercial purpose of the clause. Clear language can require deference to the cedant’s settlement; vague language may leave greater scope for independent review. Parties should therefore specify whether the clause covers legal expenses, ex gratia payments, compromise settlements, allocation decisions and follow-on judgments.

4. Recoveries, Security and Insolvency

A reinsurance recovery is an asset of the cedant, but its value depends on collectability. The cedant must establish that the claim falls within the reinsurance, quantify the amount, satisfy procedural conditions and account for deductibles, limits and prior payments. Recoveries may be delayed by disputes over occurrence, aggregation, allocation, late notice or the application of exclusions.

Security arrangements reduce counterparty credit risk. These may include letters of credit, trust accounts, funds withheld, deposits, collateralised reinsurance or guarantees. Each has legal and operational risks. A letter of credit may be affected by documentary conditions, insolvency or regulatory restrictions. A trust must be validly constituted, properly administered and enforceable in the relevant jurisdiction. Collateral may also create liquidity pressure for the reinsurer.

The insolvency of either party raises difficult questions. The cedant may owe premium while seeking recoveries; set-off rights may be restricted; and the policyholder may face delay even though the reinsurance asset exists. Some jurisdictions permit direct claims against reinsurers in defined circumstances, while others enforce strict privity. Insolvency planning should therefore address commutation, security, set-off, cut-through provisions and claims-payment priorities before financial distress occurs.

5. Fronting, Captives and Retrocession

5.1 Fronting arrangements

In a fronting arrangement, a licensed insurer issues the policy but transfers most or all of the economic risk to another insurer, reinsurer or captive. Fronting may allow a group to access a market where it lacks a licence, satisfy compulsory insurance requirements or present a single insurance programme across jurisdictions.

The fronting insurer remains exposed to regulatory and often credit risk. It may be liable to the policyholder even if the reinsurer fails. Accordingly, fronting agreements commonly require collateral, minimum security, claims protocols, audit rights and indemnities. Regulators may scrutinise whether the fronting insurer retains meaningful underwriting oversight or is merely lending its licence.

5.2 Captive insurance companies

A captive is an insurer established primarily to insure risks of its parent or affiliated group. A pure captive may insure only its owner; a group captive may serve several related entities; and an association captive may insure members of an association. Captives can improve risk information, promote loss prevention, retain underwriting profits and access reinsurance markets.

They also create challenges. A captive must have genuine risk transfer, adequate capital, independent governance and proper claims administration. Excessive related-party influence, weak reserving, inadequate diversification and aggressive tax or accounting objectives can undermine the arrangement. Regulators may apply substance-over-form analysis where the captive does not operate as a genuine insurer.

5.3 Retrocession

Retrocession is reinsurance purchased by a reinsurer. It permits the reinsurer to manage accumulations, protect capital and diversify geographically. However, it creates additional counterparty and basis risks. The retrocession may not respond on the same terms as the original reinsurance, creating a gap between the reinsurer’s liability and its recovery.

The principle that a reinsurer should not assume more risk than it can manage requires careful retrocession governance. Excessive reliance on a small number of retrocessionaires, opaque collateral structures or concentrated catastrophe exposures may transmit rather than eliminate systemic risk.

6. Alternative Risk Transfer and Insurance-Linked Securities

Alternative risk transfer (ART) combines insurance, capital-market and financial techniques. It is used where conventional insurance is unavailable, too expensive, too narrow or unable to provide sufficient capacity. ART includes finite risk arrangements, protected cells, contingent capital, parametric covers, industry loss warranties and insurance-linked securities (ILS).

Finite risk arrangements spread losses and financing over time, often with substantial financial and accounting elements. Their legality and regulatory treatment depend on whether meaningful risk transfer exists and whether the arrangement is being used primarily for insurance, financing or earnings management. Transparent disclosure is essential.

Insurance-linked securities transfer insurance risk to investors. In a catastrophe bond, a sponsor transfers specified catastrophe risk to a special-purpose vehicle. Investors provide collateral and receive interest; if a defined trigger occurs, some or all collateral is used to meet the sponsor’s loss. Triggers may be indemnity-based, industry-loss-based, parametric or modelled-loss-based.

Trigger selection involves a trade-off. Indemnity triggers reduce basis risk but require claims verification and may expose investors to the sponsor’s claims process. Parametric triggers provide speed and transparency but may fail to match the sponsor’s actual loss. Modelled-loss triggers depend heavily on models and data quality. Documentation must address attachment, exhaustion, event duration, hours clauses, notice, calculation agents, collateral custody and investor rights.

7. Cross-Border Enforceability and Regulatory Coordination

International reinsurance contracts commonly involve a cedant, reinsurer, broker, collateral provider and claims participants located in different jurisdictions. Four legal questions are fundamental: which law governs, which forum has jurisdiction, whether an award or judgment will be recognised, and whether regulatory restrictions affect performance.

The contract should contain a clear governing-law clause and dispute-resolution mechanism. Arbitration is frequently used because it can offer confidentiality, specialist decision-makers and greater international enforceability under instruments such as the New York Convention, subject to its conditions and the law of the enforcement state. Arbitration clauses should identify the seat, institution or procedure, number of arbitrators, language and interim-relief arrangements.

Choice of law does not eliminate mandatory local rules. Insurance licensing, sanctions, insolvency, exchange controls, data protection, consumer protection and public policy may override or affect the chosen law. A reinsurer may also be unable to pay a claim if payment would breach sanctions or another mandatory prohibition.

Cross-border transactions require attention to regulatory equivalence, financial-crime controls, beneficial ownership, tax, data transfers and recognition of collateral. The legal validity of a contract and the practical ability to collect under it are separate questions. Due diligence should therefore examine both substantive enforceability and the financial infrastructure supporting payment.

8. A Decision Framework for Reinsurance Design

A professional designing a reinsurance programme should proceed in a disciplined sequence:

1. Define the risk objective: capacity, catastrophe protection, earnings stability, capital relief or market access.

2. Analyse the portfolio: limits, geography, perils, exposure concentrations, claims history and data quality.

3. Select the structure: facultative or treaty, proportional or non-proportional, and appropriate layers.

4. Test the economics: premium, commission, attachment, limit, reinstatement, collateral cost and expected recovery.

5. Test legal wording: scope, exclusions, aggregation, notice, claims clauses, governing law and dispute resolution.

6. Assess counterparties: capital, ratings, concentration, collateral and retrocession.

7. Establish governance: authority, reporting, audit, claims escalation and board oversight.

8. Model adverse outcomes: catastrophe, inflation, silent cyber exposure, reinsurer default and jurisdictional disruption.

This approach prevents the common error of choosing a low-cost structure without understanding coverage gaps or collection risk.

9. Illustrative Case Study: The Meridian Infrastructure Programme

Background

Meridian Infrastructure Group operates energy and transport assets in four countries. Its licensed insurer, Meridian Risk Insurance Ltd., has historically retained most property catastrophe risk. A major expansion increases its probable maximum loss beyond available capital. The group proposes a programme involving a quota-share treaty, catastrophe excess-of-loss cover, a captive and a fronting insurer in a country requiring locally admitted policies.

Situation and problem

The proposed reinsurer requests broad claims-control rights and requires collateral. The captive wants to receive premium and retain predictable losses, while the fronting insurer wants full security because it remains liable to local policyholders. A catastrophe bond is also considered, but the group prefers a parametric trigger based on wind speed. The legal team must determine whether the programme provides reliable protection and whether recoveries can be enforced across jurisdictions.

Analysis

The quota-share treaty would provide capacity and share ordinary losses, but it could transfer profitable business unnecessarily. Catastrophe excess-of-loss would better protect capital against severe events, but the attachment point must be tested against updated valuations and inflation. The parametric bond would pay quickly after a qualifying event, yet basis risk could be substantial if wind speed is high while Meridian’s actual loss is low, or if property damage is severe outside the trigger location.

The fronting insurer’s exposure means that a promise by the captive to reimburse it is insufficient without enforceable collateral. The captive must also demonstrate adequate capital, independent claims governance and genuine risk transfer. Claims-control wording should not allow the reinsurer to delay payment indefinitely or compromise Meridian’s obligations to policyholders.

Approach and solution

Meridian adopts a layered programme. The captive retains predictable working losses and purchases aggregate protection. A highly rated reinsurer provides catastrophe excess-of-loss cover, supported by a trust arrangement. The fronting insurer receives collateral and retains authority to pay local claims in accordance with applicable law. A catastrophe bond is issued with a dual trigger: a parametric threshold combined with a modelled-loss condition, reducing the possibility of payment for an event unrelated to material portfolio damage.

The contracts include a clear governing law, arbitration seat, claims-notification timetable, follow-the-settlements protection, sanctions wording, audit rights and procedures for replacing collateral. The board receives quarterly reports on exposure, reinstatement use, counterparty concentration and recovery status.

Outcome

The programme improves capital resilience and preserves local market access. It does not eliminate risk: basis risk remains under the bond, collateral may become expensive, and cross-border enforcement still depends on local insolvency and regulatory rules. However, the structure aligns each instrument with a defined purpose rather than treating reinsurance as a single undifferentiated purchase.

Learning points

The case illustrates that risk transfer must be evaluated on four dimensions: coverage, collectability, capital effect and governance. A transaction that transfers risk in theory may fail in practice if triggers are poorly designed, collateral is unavailable, or the cedant cannot comply with claims and reporting obligations.

10. Challenges, Governance and Professional Ethics

The principal risks in complex reinsurance include ambiguous wording, inadequate data, model error, counterparty default, accumulation, silent cyber exposure, sanctions violations and regulatory arbitrage. A further risk is moral hazard: a party may underwrite or settle differently when it expects another party to bear the loss.

Governance should separate underwriting, claims, actuarial, legal, finance and risk functions while ensuring effective communication among them. Boards should understand material exclusions, capital assumptions and recovery dependencies rather than relying solely on broker presentations or rating labels.

Ethically, parties should not conceal adverse information, manipulate triggers, inflate losses, use sham captives or structure finite arrangements to disguise borrowing. Claims should be handled fairly, and policyholder interests should not be subordinated merely because the insurer expects reimbursement from a reinsurer. Professional advice must distinguish legal possibility from commercial prudence.

Technology can improve bordereau validation, exposure aggregation, claims triage and catastrophe modelling. Artificial intelligence may identify anomalies in underwriting or claims data, but models require validation, explainability, cybersecurity controls and human oversight. Poor data quality can make automated analysis appear precise while producing unreliable conclusions.

11. Current Developments and Best Practices

Contemporary programmes increasingly address climate-related accumulation, cyber aggregation, pandemic-type exclusions, trapped collateral, alternative capital and faster settlement. Parametric products and ILS markets continue to develop, while regulators are paying greater attention to interconnectedness, operational resilience and counterparty concentration.

Best practice includes:

• documenting the commercial purpose and economic substance of each transaction;
• using precise definitions for event, loss, occurrence, aggregation and hours clauses;
• testing recoveries under stressed scenarios;
• aligning treaty wording with underlying policy language;
• conducting legal opinions in all material jurisdictions;
• monitoring reinsurer and retrocessionaire concentration;
• maintaining reliable exposure and claims data;
• reviewing collateral enforceability periodically; and
• recording governance decisions and conflicts of interest.

Chapter Summary

Reinsurance transfers risk from an insurer to a reinsurer but does not ordinarily remove the cedant’s obligations to policyholders. Facultative reinsurance is individually negotiated, whereas treaty reinsurance applies automatically to an agreed portfolio. Proportional structures share premiums and losses; non-proportional structures respond above specified retentions.

The effectiveness of reinsurance depends on disclosure, underwriting discipline, claims cooperation, timely notice, accurate records and reinsurer solvency. Follow-the-fortunes and follow-the-settlements clauses can protect the cedant’s claims decisions, but they do not override scope, exclusions or fraud requirements. Recoveries must be assessed for both legal validity and practical collectability.

Fronting, captives and retrocession distribute risk through specialised structures, while ART and ILS connect insurance with capital markets. Cross-border enforceability depends on governing law, dispute resolution, mandatory regulation, insolvency rules and collateral. Sound reinsurance management therefore combines legal drafting, actuarial analysis, financial assessment, governance and ethical judgment.

Key Terms

Facultative reinsurance: Reinsurance negotiated separately for an individual risk.

Treaty reinsurance: An agreement covering a defined class or portfolio of risks automatically.

Cedant: The insurer transferring risk to a reinsurer.

Reinsurer: The insurer accepting risk from a cedant.

Retrocession: Reinsurance purchased by a reinsurer.

Quota share: Proportional reinsurance sharing a fixed percentage of premiums and losses.

Surplus share: Proportional cover applying to amounts exceeding the cedant’s retention.

Excess of loss: Reinsurance responding to losses above an agreed retention.

Attachment point: The loss level at which non-proportional reinsurance begins to respond.

Reinstatement: Restoration of reinsurance limit after it has been used by a loss.

Follow-the-fortunes: A clause requiring the reinsurer generally to follow the cedant’s underwriting fortunes.

Follow-the-settlements: A clause concerning the reinsurer’s obligation to respect qualifying settlements by the cedant.

Fronting: Issuance of insurance by one insurer with substantial risk transferred to another party.

Captive insurer: An insurer established mainly to cover risks of its owner or affiliated group.

Alternative risk transfer: Risk-financing methods combining insurance and financial-market techniques.

Insurance-linked security: A security whose returns or principal depend on the occurrence of insured events.

Basis risk: The risk that the protection trigger does not match the actual loss.

Collateralised reinsurance: Reinsurance supported by assets securing the reinsurer’s obligations.

Cut-through clause: A provision potentially giving an insured direct access to reinsurance proceeds.

Bordereau: A periodic report containing detailed risk, premium or claims information.

Review Questions

Short Answer Questions

1. What is the principal difference between facultative and treaty reinsurance?

2. Explain the function of an attachment point.

3. What is retrocession, and why is it used?

4. State two typical duties of a cedant after placement.

5. What is basis risk in a parametric insurance-linked security?

Long Answer Questions

1. Compare proportional and non-proportional reinsurance, including their commercial purposes and legal issues.

2. Explain the operation and limitations of follow-the-fortunes and follow-the-settlements clauses.

3. Discuss the legal and governance risks of fronting and captive insurance arrangements.

4. Analyse the factors affecting the collectability of a reinsurance recovery.

5. Explain how governing law, arbitration, insolvency and mandatory regulation affect cross-border reinsurance.

Analytical / Application Questions

1. An insurer settles a complex claim honestly but fails to provide notice within the treaty period. Analyse whether the reinsurer should be permitted to deny recovery.

2. A company is considering replacing catastrophe excess-of-loss cover with a parametric catastrophe bond. Evaluate the principal advantages, limitations and basis-risk implications.

3. A fronting insurer is promised reimbursement by a lightly capitalised captive but receives no collateral. Assess the arrangement from the perspectives of policyholder protection, regulation and counterparty risk.

22. Multiple Choice Questions with Answers

Question 1

Which arrangement normally requires the reinsurer to assess and accept an individual risk separately?

A. Quota-share treaty

B. Facultative reinsurance

C. Aggregate excess-of-loss treaty

D. Retrocession treaty

Correct Answer: B. Facultative reinsurance

Question 2

A catastrophe excess-of-loss layer generally responds when:

A. Every insured risk produces a loss

B. The cedant’s total premium falls below target

C. Losses from a defined event exceed the attachment point

D. The reinsurer exercises audit rights

Correct Answer: C. Losses from a defined event exceed the attachment point

Question 3

What is the principal function of a follow-the-settlements clause?

A. To eliminate all exclusions in the reinsurance contract

B. To require the reinsurer to respect qualifying settlements made by the cedant

C. To transfer policyholder rights automatically to the reinsurer

D. To guarantee payment despite reinsurer insolvency

Correct Answer: B. To require the reinsurer to respect qualifying settlements made by the cedant

Question 4

Which statement best describes fronting?

A. A reinsurer issues policies directly to all original insureds

B. A licensed insurer issues the policy while transferring substantial risk elsewhere

C. A captive retrocedes all risks to its parent

D. A broker guarantees the insurer’s claims payments

Correct Answer: B. A licensed insurer issues the policy while transferring substantial risk elsewhere

Question 5

A major disadvantage of a parametric catastrophe bond is that it may:

A. Require no predefined trigger

B. Create basis risk between the trigger and the sponsor’s actual loss

C. Prevent investors from receiving interest

D. Always require individual facultative underwriting

Correct Answer: B. Create basis risk between the trigger and the sponsor’s actual loss

Question 6

Why is collateral commonly required in a fronting arrangement?

A. The fronting insurer has no liability to policyholders

B. The fronting insurer may remain liable even if the risk-taking party fails

C. Collateral removes all regulatory requirements

D. It converts treaty reinsurance into facultative reinsurance

Correct Answer: B. The fronting insurer may remain liable even if the risk-taking party fails

Question 7

Which of the following is an example of proportional reinsurance?

A. Per-risk excess of loss

B. Catastrophe excess of loss

C. Quota share

D. Aggregate stop loss only

Correct Answer: C. Quota share

Question 8

What does retrocession refer to?

A. Insurance purchased by an original policyholder

B. Reinsurance purchased by a reinsurer

C. A settlement paid directly by a broker

D. A policy amendment increasing the deductible

Correct Answer: B. Reinsurance purchased by a reinsurer

Question 9

In cross-border reinsurance, a governing-law clause primarily identifies:

A. The insurer’s premium rate

B. The legal system used to interpret the contract

C. The catastrophe model selected by investors

D. The amount of collateral required in every case

Correct Answer: B. The legal system used to interpret the contract

Question 10

Which practice best supports reliable reinsurance recoveries?

A. Avoiding written claims protocols

B. Using broad undefined event language

C. Maintaining accurate records and complying with notice requirements

D. Relying exclusively on the broker’s rating assessment

Correct Answer: C. Maintaining accurate records and complying with notice requirements