Reinsurance, Risk Transfer and Insurance Groups

Introduction and context

Insurance rarely operates as a single, self-contained balance sheet. Insurers transfer part of their underwriting risk to reinsurers; reinsurers may transfer exposures again through retrocession; and several insurers may be controlled by a common parent. These arrangements improve capacity and diversification, but they also create legal dependencies, concentration risk, contagion channels and regulatory-compliance challenges.

Reinsurance is therefore not merely a purchasing function. It is a contractual, financial, actuarial and governance discipline. Its effectiveness depends on the legal quality of the contract, the clarity of the risk transferred, the financial strength of the counterparty, the enforceability of claims provisions and the regulatory treatment of recoverables. A technically attractive programme may fail if the cedant cannot recover when needed, if exclusions are misunderstood, or if the transaction does not transfer sufficient insurance risk.

This chapter examines treaty and facultative reinsurance, retrocession, alternative risk transfer, key contract clauses, recoverability, counterparty risk, insurance-group supervision, intra-group transactions and capital implications. Regulatory rules differ by jurisdiction; consequently, the discussion uses internationally recognised principles and identifies areas requiring reference to applicable national law.

Learning objectives

By the end of this chapter, a learner should be able to:

1. Distinguish treaty, facultative, proportional and non-proportional reinsurance.
2. Explain retrocession and alternative risk-transfer mechanisms.
3. Interpret important reinsurance clauses and identify sources of dispute.
4. Assess the legal and financial recoverability of reinsurance assets.
5. Evaluate reinsurer counterparty risk and concentration.
6. Explain group supervision, intra-group transactions and contagion risk.
7. Analyse the effect of reinsurance and group structures on regulatory capital.
8. Recommend governance and control practices for a robust reinsurance programme.

1. The economic and legal function of reinsurance

Reinsurance is an agreement under which one insurer, the cedant or ceding insurer, transfers specified insurance risks to another insurer, the reinsurer, in return for consideration, usually a premium. The cedant remains responsible to its policyholder unless applicable law provides otherwise. This is the central distinction between reinsurance and a direct policy: reinsurance normally creates a contractual relationship between cedant and reinsurer, not between the policyholder and reinsurer.

Reinsurance serves several purposes:

• Capacity: It allows an insurer to accept risks exceeding its desired net retention.
• Protection against volatility: Catastrophe and large-loss covers reduce earnings and surplus volatility.
• Capital management: Risk transfer may reduce required capital, subject to regulatory recognition.
• Expertise: A reinsurer may provide underwriting, claims and catastrophe-modelling knowledge.
• Portfolio diversification: International or multi-line reinsurers may absorb risks that are concentrated in the cedant.
• Market access: Reinsurance can support new products or geographical expansion.

The economic value of reinsurance is not equal to the ceded premium. The cedant must compare the cost of protection with expected recoveries, reduced capital requirements, liquidity benefits, rating considerations and the possibility of counterparty default.

Indemnity and risk transfer

Most traditional reinsurance is based on indemnity: the reinsurer reimburses the cedant for covered loss, subject to the contract. A valid risk-transfer analysis asks whether the reinsurer is exposed to genuine, uncertain insurance risk and whether the arrangement is more than a financing deposit disguised as reinsurance.

Important indicators of meaningful transfer include:

• uncertainty about the timing, frequency or severity of insured events;
• a credible possibility that the reinsurer will pay materially more than the premium received;
• absence of arrangements that guarantee repayment of the premium or eliminate loss exposure;
• alignment between the contract wording and the underlying insurance risks; and
• proper recognition of limits, exclusions, reinstatements and aggregate features.

Accounting standards and prudential rules may apply different tests. A contract can be legally valid yet receive limited capital or accounting recognition if the risk transfer is insufficient, the collateral is unavailable, or the structure creates excessive basis risk.

2. Main forms of reinsurance

2.1 Treaty reinsurance

A treaty automatically covers a defined class or portfolio of risks written by the cedant during the treaty period. The cedant generally has an obligation to cede risks within the scope, and the reinsurer generally has an obligation to accept them. Treaty reinsurance is efficient for volume business because individual approval is unnecessary.

Typical treaty forms include:

• quota share;
• surplus share;
• per-risk excess of loss;
• catastrophe or per-occurrence excess of loss; and
• aggregate excess of loss or stop-loss.

Treaty reinsurance depends heavily on accurate portfolio definitions, underwriting controls and bordereaux or data reporting. A broad treaty may produce unintended accumulation, while a narrow treaty may fail to protect the risks management believed were covered.

2.2 Facultative reinsurance

Facultative reinsurance is negotiated for an individual risk or a specific policy. The reinsurer evaluates the risk separately and may accept, reject or modify it. It is useful for unusually large, hazardous or non-standard risks that exceed treaty terms.

Its advantages are precision and underwriting flexibility. Its disadvantages include transaction cost, delay, possible mismatches between the direct policy and facultative wording, and the risk that a placement is not fully completed before the insurer binds the original risk. Evidence of the reinsurer’s written agreement, effective date and exact participation is therefore essential.

2.3 Proportional reinsurance

Under proportional reinsurance, premium and losses are shared according to a stated proportion, subject to any applicable limits. In quota-share reinsurance, the reinsurer assumes a fixed percentage of every covered risk. In surplus-share reinsurance, the reinsurer participates above the cedant’s retention, often expressed in lines.

For a simple quota-share arrangement, if the reinsurer’s share is q and the gross premium is P, the ceded premium is:

If covered gross loss is L, the reinsurer’s proportional loss is:

Here q is dimensionless and lies between 0 and 1; P and L are monetary amounts. The relationship assumes that the contract contains no separate cap, sliding commission, loss corridor or other adjustment.

Proportional treaties commonly include commissions to compensate the cedant for acquisition and administration costs. A ceding commission may be fixed, adjustable or profit-based. Commission provisions must be analysed alongside loss-ratio corridors, expense allowances and experience accounts because these can substantially alter the economic transfer.

2.4 Non-proportional reinsurance

Non-proportional reinsurance responds when loss exceeds a specified attachment point. In per-risk excess of loss, the attachment and limit apply to an individual risk. In catastrophe excess of loss, losses from multiple policies arising from one occurrence may be aggregated. Aggregate excess of loss responds when cumulative losses over a period exceed an attachment point.

For one covered loss L, attachment A and limit M, the reinsurer’s payment, ignoring exclusions and reinstatement premiums, is:

R and L are monetary amounts. A is the attachment point and M is the maximum recovery for the event or contract layer. The formula applies only where the contract defines loss on the same basis as L and does not contain an alternative event definition, franchise deductible or aggregate limit.

A programme may contain several layers. For example, a layer described as “$10 million excess of $5 million” generally attaches at $5 million and pays up to a further $10 million. Clear drafting is required because “loss occurrence,” “event,” “series of losses,” hours clauses and aggregation language determine whether multiple claims are treated as one occurrence.

3. Retrocession and risk-transfer chains

Retrocession is reinsurance purchased by a reinsurer. The reinsurer becomes a retrocedant and transfers part of its assumed portfolio to a retrocessionaire. A chain may therefore be represented as:

Cedant → Reinsurer → Retrocessionaire.

Retrocession supports capacity and diversification but introduces additional dependencies. A cedant normally cannot recover directly from a retrocessionaire merely because the reinsurer is insolvent. The cedant’s legal claim is ordinarily against its reinsurer, unless the contract contains a cut-through provision or applicable insolvency law provides another route.

Risks in retrocession include:

• opacity regarding ultimate counterparties;
• correlated exposure to the same catastrophe;
• delayed claims settlement;
• disputes over aggregation and follow-the-settlements obligations;
• collateral or trust enforceability; and
• substitution or commutation without adequate oversight.

A reinsurer should not treat retrocession as eliminating the original risk. It creates a new counterparty exposure and may itself be unavailable precisely when catastrophe losses are highest.

4. Alternative risk transfer

Alternative risk transfer (ART) combines insurance principles with capital-market or financing techniques. It is generally considered when conventional reinsurance is unavailable, expensive, capacity constrained or poorly suited to the exposure.

Important forms include:

4.1 Captive insurance

A captive is an insurer established primarily to insure risks of its parent or related companies. Captives can improve risk information, retain predictable losses and access reinsurance markets. They also raise governance concerns: independence of underwriting, adequate capital, claims fairness, fronting arrangements, domicile regulation and potential regulatory arbitrage.

4.2 Risk retention groups and protected cells

A protected-cell structure separates assets and liabilities into legally or economically distinct cells within a wider vehicle. Its usefulness depends on statutory segregation, insolvency law, operational controls and the enforceability of cell boundaries.

4.3 Insurance-linked securities

Catastrophe bonds and related instruments transfer defined insurance or catastrophe risk to capital-market investors. Investors may lose principal or interest when a specified trigger occurs. Triggers may be indemnity-based, industry-loss based, parametric or modelled-loss based.

Indemnity triggers closely reflect the sponsor’s actual loss but require claims verification and may create moral-hazard concerns. Parametric triggers can pay quickly but create basis risk: the payment may not match the sponsor’s actual loss. A robust assessment must consider trigger transparency, calculation-agent independence, collateral structure, model uncertainty and investor concentration.

4.4 Derivatives and contingent capital

Weather derivatives, catastrophe derivatives and contingent-capital facilities may provide liquidity or protection. Their legal character, accounting treatment and regulatory recognition depend on the instrument’s terms and jurisdiction. They should not be described as insurance without analysing whether the contract transfers insurance risk and satisfies the applicable legal definition.

5. Contract interpretation and important clauses

Reinsurance disputes frequently arise not from the commercial intention but from imprecise drafting, inconsistent data or conflicting clauses. The contract should be read as an integrated instrument, with attention to definitions, schedules, endorsements and governing law.

A claims cooperation clause normally requires the cedant to provide information and consult the reinsurer. A claims control clause gives the reinsurer greater influence over defence or settlement. The distinction matters because excessive control may be inconsistent with the cedant’s duties to policyholders and may create delay.

A follow-the-settlements clause generally supports finality by requiring the reinsurer to respect a settlement that is covered, within the cedant’s authority and reached honestly and reasonably. It does not ordinarily transform an uncovered direct-policy payment into a covered reinsurance loss.

A notice clause should be assessed under the governing law. Some legal systems treat late notice as relevant only where the reinsurer suffers prejudice; others enforce contractual conditions more strictly. Operationally, the cedant should maintain automated notification thresholds, an escalation process and evidence of transmission.

6. Recoverability and counterparty risk

A reinsurance recoverable is valuable only if it can be collected when required. Recoverability has at least five dimensions:

1. Legal recoverability: the contract is valid, enforceable and properly executed.
2. Coverage recoverability: the loss falls within the scope, period, attachment and limit.
3. Operational recoverability: data, notices and claims files satisfy contractual requirements.
4. Financial recoverability: the reinsurer has adequate resources or effective collateral.
5. Timing recoverability: payment arrives soon enough to meet claims and liquidity needs.

Counterparty risk is often concentrated. Several reinsurers may be related entities, may rely on the same retrocessionaire, or may be exposed to the same catastrophe. A rating alone is insufficient. Assessment should include capital strength, liquidity, reserving quality, jurisdiction, collateral, claims-payment history, dispute record, ownership and concentration.

A simplified expected-loss assessment can be expressed as:

where EL is expected counterparty loss, PD is probability of default over the relevant horizon, LGD is loss given default as a proportion of exposure, and EAD is exposure at default. The formula assumes the quantities are defined over a consistent horizon and that dependence, collateral and recovery timing are either incorporated into the estimates or separately modelled. It is a risk-management approximation, not a complete regulatory capital formula.

For example, if exposure is $20 million, estimated probability of default is 3%, and loss given default is 40%, then:

The estimate may be understated where catastrophe losses increase both the cedant’s exposure and the reinsurer’s probability of default. This is a form of wrong-way risk. Stress testing should therefore examine simultaneous severe underwriting losses, collateral deterioration, foreign-exchange movements and payment delays.

Collateral may include trusts, letters of credit, funds withheld, parent guarantees or premium-deposit arrangements. Controls must test legal title, perfection, eligible assets, valuation haircuts, access during insolvency and concentration in the collateral provider. Collateral is not automatically equivalent to cash: a letter of credit can be subject to bank risk, documentary conditions and legal restrictions.

7. Insurance groups and group supervision

An insurance group consists of two or more entities linked by ownership, control or significant influence, with at least one insurance undertaking. Group structures may include holding companies, insurers, reinsurers, brokers, asset managers, service companies and non-insurance subsidiaries.

Solo supervision examines an individual regulated insurer. Group supervision examines risks that are invisible or understated at solo level, including:

• double or multiple gearing of capital;
• intra-group guarantees and circular financing;
• concentration of assets or reinsurance;
• contagion from an unregulated affiliate;
• governance conflicts and opaque ownership;
• group-wide liquidity stress; and
• operational, cyber and reputational dependencies.

A group supervisor coordinates with solo supervisors through supervisory colleges, information sharing, coordinated inspections and crisis-management arrangements. Effective supervision must respect confidentiality while ensuring that material information crosses borders.

Group supervision does not mean that every group entity is treated as one legal person. Separate legal personality, policyholder priority, local ring-fencing and insolvency rules remain important. The practical challenge is to combine a consolidated view of risk with recognition of legal-entity constraints.

8. Intra-group transactions and governance

Intra-group transactions (IGTs) include reinsurance, loans, guarantees, management agreements, asset transfers, service contracts, dividends and derivative arrangements between related entities. They can be economically efficient, but they may also shift risk away from a regulated entity without genuine external transfer.

A group should maintain an IGT inventory recording counterparties, value, purpose, terms, approvals, collateral, maturity and regulatory reporting status. Material transactions should be assessed for arm’s-length characteristics, conflicts of interest, concentration and stress performance.

Particular caution is required where:

• a subsidiary cedes most of its risk to a parent or affiliate;
• the same capital is counted at multiple entities;
• guarantees are revocable or unsupported;
• fees are set to extract surplus from a regulated insurer;
• assets are transferred at uncertain valuations; or
• a service provider is operationally essential but financially weak.

The board should approve a group risk appetite, related-party policy, reinsurance strategy and escalation thresholds. Independent risk, compliance and actuarial functions should challenge assumptions rather than merely document management decisions.

9. Regulatory capital implications

Reinsurance may reduce net insurance risk, but capital relief is conditional. Prudential frameworks commonly require consideration of underwriting risk, counterparty default risk, market risk, operational risk and, at group level, diversification and contagion. The precise calculation varies by regime.

A generic risk-based capital aggregation may be represented as:

Here SCR is the aggregate solvency-capital requirement, SCRᵢ and SCRⱼ are capital requirements for risk modules, and Corrᵢⱼ is the prescribed correlation parameter. This formula applies only where the relevant regulatory framework authorises a correlation-matrix aggregation approach. It assumes the risk modules and correlations are defined consistently; it is not a universal capital formula.

Reinsurance can reduce the underwriting component but may increase counterparty exposure. Capital treatment may also be restricted by:

• non-recognition of unsecured recoverables above limits;
• collateral eligibility rules;
• concentration thresholds;
• credit-quality adjustments;
• mismatch between ceded and retained risks;
• inadequate documentation;
• contract uncertainty; and
• lack of legal enforceability in the reinsurer’s jurisdiction.

At group level, consolidated capital may be reduced by double counting. If a parent records an investment in a subsidiary as an asset while the subsidiary counts the parent’s capital support, the apparent group strength may be exaggerated. Group solvency analysis must therefore eliminate intra-group items and test the fungibility and transferability of capital.

Management should distinguish three concepts: gross capital, before reinsurance; net capital, after recognised risk mitigation; and available capital, after deductions, restrictions and stress adjustments. A reinsurance programme that improves the reported ratio but creates severe liquidity or counterparty vulnerability may not improve the insurer’s real resilience.

10. Illustrative case: Meridian Assurance Group

Background

Meridian Assurance Group, an illustrative fictional case, operates a property insurer in a coastal market and owns a small captive reinsurer in another jurisdiction. The property insurer purchases a catastrophe treaty covering $100 million excess of $25 million per occurrence. It also cedes 30% of its commercial property portfolio to the captive under a quota-share treaty. The captive retrocedes much of its exposure to two external reinsurers.

Problem

A major storm produces gross covered losses of $88 million. The property insurer expects a catastrophe recovery of $63 million under the excess-of-loss treaty, calculated as $88 million less the $25 million attachment. At the same time, the captive experiences serious liquidity stress because its retrocessionaires dispute whether several related storm systems constitute one occurrence. The group’s reported solvency position appears strong because the insurer records both the catastrophe recoverable and the quota-share recoverable.

Analysis

The board identifies four issues. First, the $63 million recovery is subject to the treaty’s occurrence definition and any event limit. Secondly, the quota-share recovery is not necessarily additional protection for losses already covered by the catastrophe treaty; the interaction of treaties must be modelled to avoid double counting. Thirdly, the captive’s retrocession does not remove the property insurer’s direct legal exposure to the captive. Fourthly, the captive’s liquidity problem may become a group contagion problem if the parent must provide support.

The legal team reviews the hours clause, occurrence wording, notice provisions and claims-cooperation obligations. The actuarial function reconstructs losses by policy, location and time. Risk management performs a stress test assuming a six-month payment delay, a 40% reduction in expected retrocession recoveries and a downgrade of one external reinsurer. Treasury estimates whether the insurer can pay policyholders without relying on disputed recoverables.

Approach and solution

Meridian adopts the following measures:

1. It submits a complete, documented notice and maintains a reservation of rights without admitting disputed coverage.
2. It separates legally certain recoverables from contingent recoverables in liquidity planning.
3. It establishes a collateral and counterparty dashboard for the captive and external reinsurers.
4. It prohibits recognition of full group benefit where the same capital or recovery is counted twice.
5. It reviews whether the captive’s retrocession programme provides genuine protection or merely produces accounting relief.
6. It requires board approval for future intra-group reinsurance and sets minimum external-retention standards.
7. It adds a scenario in which the captive is unable to pay while the parent faces simultaneous catastrophe claims.

Outcome

The insurer ultimately recovers $58 million promptly under the catastrophe treaty, while $5 million remains disputed because of aggregation and hours-clause questions. The quota-share recovery is collected later, but only after reconciliation of the treaty interaction. Meridian’s stress test shows that its regulatory ratio remains above the supervisory threshold, but its internal liquidity limit would have been breached without a contingency facility.

Learning points

The case demonstrates that nominal ceded protection is not the same as available protection. Treaty interaction, occurrence wording, retrocession dependence, group capital fungibility and liquidity timing must be assessed together. Boards should evaluate reinsurance as a system of contracts and counterparties, not as a single percentage of ceded premium.

11. Contemporary developments and technology

Climate change is increasing uncertainty in catastrophe frequency, severity and correlation. Historical loss data may be a poor guide to future exposure, making scenario analysis and model governance increasingly important. Emerging risks such as cyber aggregation, pandemic interruption and supply-chain disruption challenge traditional definitions of occurrence and accumulation.

Artificial intelligence can assist with treaty extraction, claims triage, exposure aggregation, counterparty monitoring and anomaly detection. However, AI does not resolve legal ambiguity. Models may misread endorsements, fail to identify exclusions, reproduce biased claims decisions or create false confidence in catastrophe estimates. Governance should require explainability, human review, version control, data lineage, validation and secure handling of confidential treaty data.

Contemporary regulatory expectations increasingly emphasise operational resilience, climate-related financial risk, outsourcing controls, recovery and resolution planning, and group-wide data quality. Technology should therefore support—not replace—legal interpretation, actuarial judgement and accountable governance.

12. Best-practice framework

A mature reinsurance and group-risk framework should include:

• a board-approved reinsurance strategy linked to risk appetite;
• clear limits for retention, catastrophe accumulation and counterparty concentration;
• legal review before binding and after material amendments;
• independent actuarial assessment of attachment probability and expected recoveries;
• documented counterparty due diligence and collateral controls;
• contract certainty, including signed lines and final wording;
• automated bordereaux reconciliation and data-quality testing;
• claims-notification and dispute-escalation protocols;
• liquidity stress testing based on delayed or reduced recoveries;
• recognition of basis risk in ART and parametric covers;
• group-wide elimination of double-counted capital and recoverables;
• supervisory reporting that is complete, timely and consistent; and
• post-event lessons-learned reviews.

The governing principle is prudence: risk transfer should be recognised only to the extent that it is legally enforceable, economically meaningful, operationally usable and financially credible.

Chapter Summary

Reinsurance transfers insurance risk but does not eliminate it. Treaty reinsurance provides portfolio-wide protection, whereas facultative reinsurance addresses individual risks. Proportional treaties share premium and loss by an agreed proportion; non-proportional treaties respond above an attachment point and within a limit. Retrocession transfers reinsurer exposure onward but creates additional counterparty and opacity risks.

Alternative risk transfer includes captives, protected cells, catastrophe bonds, derivatives and contingent capital. These mechanisms may improve capacity but introduce basis risk, model risk and legal-compliance questions. Contract clauses—particularly occurrence, aggregation, follow-the-settlements, notice, claims cooperation, reinstatement, insolvency and cut-through provisions—determine practical recoverability.

Recoverability depends on legal enforceability, coverage, operational compliance, counterparty resources and payment timing. Insurance groups require consolidated oversight of capital, liquidity, intra-group transactions, contagion and double gearing. Reinsurance may reduce capital requirements only when regulatory recognition conditions are satisfied, and it may simultaneously create counterparty risk. Effective governance combines legal certainty, actuarial analysis, stress testing, technology controls and independent board oversight.

Key Terms

Reinsurance: Contractual transfer of specified insurance risk from a cedant to a reinsurer.

Cedant: Insurer transferring risk under a reinsurance contract.

Treaty reinsurance: Reinsurance covering a defined portfolio or class automatically within agreed terms.

Facultative reinsurance: Individually negotiated reinsurance for a particular risk or policy.

Proportional reinsurance: Reinsurance in which premium and losses are shared by an agreed proportion.

Non-proportional reinsurance: Reinsurance responding when losses exceed an attachment point.

Quota share: Proportional treaty under which a fixed percentage of each covered risk is ceded.

Excess of loss: Cover responding above a specified retention and up to a stated limit.

Retrocession: Reinsurance purchased by a reinsurer.

Alternative risk transfer: Risk-financing arrangements combining insurance and capital-market techniques.

Captive: Insurer established primarily to insure risks of its owner or affiliated entities.

Basis risk: Risk that an ART trigger or payment does not match the insured’s actual loss.

Recoverable: Amount expected to be collected from a reinsurer.

Counterparty risk: Risk that a contractual counterparty fails to perform.

Wrong-way risk: Risk that counterparty default becomes more likely when the insurer’s exposure increases.

Cut-through clause: Provision potentially allowing payment directly to an insured or other beneficiary.

Intra-group transaction: Transaction between entities within the same corporate group.

Group supervision: Supervisory oversight of risks arising across an insurance group.

Double gearing: Multiple recognition of the same capital within related entities.

Contract certainty: Clear, documented and agreed contractual terms at or promptly after inception.

Review Questions

Short Answer Questions

1. What is the principal distinction between treaty and facultative reinsurance?
2. Define retrocession and identify one risk it creates.
3. What is meant by recoverability of a reinsurance asset?
4. Explain the difference between a claims cooperation clause and a claims control clause.
5. Why can reinsurance reduce underwriting risk while increasing counterparty risk?

Long Answer Questions

1. Compare proportional and non-proportional reinsurance, including their pricing, operational and capital implications.
2. Explain how occurrence definitions, aggregation language and hours clauses affect catastrophe recoveries.
3. Discuss the role of group supervision in addressing contagion, double gearing and intra-group transactions.
4. Evaluate the benefits and limitations of captives and insurance-linked securities as alternative risk-transfer mechanisms.
5. Develop a governance framework for assessing reinsurance recoverables and counterparty exposures.

Analytical / Application Questions

1. An insurer has a $15 million excess of $10 million layer and suffers a covered loss of $32 million. Calculate the layer recovery, assuming no exclusions, reinstatement issues or aggregate limit. Explain which additional facts would be needed before recognising the full recovery.
2. A parent insurer cedes 80% of its portfolio to a captive owned by the same group. Analyse the legal, capital, liquidity and governance risks if the captive retrocedes 90% of the exposure to one reinsurer.
3. A catastrophe bond pays when an independently calculated industry loss exceeds a specified threshold, but the sponsor’s actual loss is much lower. Analyse the basis-risk consequences and explain why the instrument may nevertheless be useful.

Multiple Choice Questions with Answers

Question 1

Which statement best describes treaty reinsurance?

A. It covers only one individually negotiated policy.

B. It automatically covers a defined portfolio within agreed terms.

C. It transfers risk directly from the policyholder to a capital-market investor.

D. It is always non-proportional.

Correct Answer: B. It automatically covers a defined portfolio within agreed terms.

Question 2

In a quota-share treaty, the ceded premium is generally calculated as:

A. The attachment point multiplied by the limit.

B. Gross premium divided by the reinsurer’s rating.

C. The agreed share multiplied by gross premium.

D. Gross loss less the retention.

Correct Answer: C. The agreed share multiplied by gross premium.

Question 3

A loss of $32 million is subject to a $10 million excess-of-loss retention with a $15 million limit. Ignoring all other terms, the recovery is:

A. $10 million

B. $15 million

C. $22 million

D. $32 million

Correct Answer: B. $15 million

Question 4

What is retrocession?

A. A direct policy issued by a reinsurer to a consumer.

B. Reinsurance purchased by a reinsurer.

C. A return premium paid by a cedant.

D. A statutory insurance guarantee.

Correct Answer: B. Reinsurance purchased by a reinsurer.

Question 5

Which factor most directly concerns legal recoverability?

A. Whether the contract is enforceable in the relevant jurisdiction.

B. Whether the reinsurer has a large marketing budget.

C. Whether the cedant has many policyholders.

D. Whether the catastrophe model uses monthly data.

Correct Answer: A. Whether the contract is enforceable in the relevant jurisdiction.

Question 6

What is wrong-way risk in reinsurance counterparty management?

A. The reinsurer pays before premium is received.

B. Default becomes more likely as the cedant’s exposure to the reinsurer increases.

C. The cedant purchases both treaty and facultative cover.

D. A claim is settled in a foreign currency.

Correct Answer: B. Default becomes more likely as the cedant’s exposure to the reinsurer increases.

Question 7

Which is a principal purpose of group supervision?

A. To eliminate separate legal personality of subsidiaries.

B. To identify risks such as contagion and double gearing across the group.

C. To guarantee every group entity’s profitability.

D. To prevent all intra-group transactions.

Correct Answer: B. To identify risks such as contagion and double gearing across the group.

Question 8

A parametric catastrophe instrument may create basis risk because:

A. It always pays the exact indemnity loss.

B. Its trigger payment may not match the sponsor’s actual loss.

C. It cannot be collateralised.

D. It is necessarily an intra-group transaction.

Correct Answer: B. Its trigger payment may not match the sponsor’s actual loss.

Question 9

Which clause commonly concerns the reinsurer’s obligation to respect a reasonable covered settlement made by the cedant?

A. Follow-the-settlements clause

B. Sanctions clause

C. Territory clause

D. Premium-audit clause

Correct Answer: A. Follow-the-settlements clause

Question 10

Why may reinsurance fail to produce full regulatory capital relief?

A. Regulators may restrict recognition because of counterparty, collateral or documentation deficiencies.

B. All reinsurance is excluded from capital calculations.

C. Only facultative reinsurance can affect capital.

D. Capital relief is automatic whenever premium is paid.

Correct Answer: A. Regulators may restrict recognition because of counterparty, collateral or documentation deficiencies.