11. Reinsurance, Coinsurance and Alternative Risk Transfer

Introduction and Context

Insurance enables individuals and organisations to transfer uncertain financial consequences to an insurer. Yet an insurer is not free from risk merely because it has issued policies. It remains exposed to accumulation, catastrophe, underwriting error, inflation, investment constraints, credit risk and volatility in claims. Reinsurance provides a second level of risk transfer by allowing an insurer, known as the cedant or ceding insurer, to transfer part of its insurance risk to another insurer, the reinsurer.

Reinsurance is therefore both a risk-management instrument and a strategic resource. It supports underwriting capacity, stabilises results, protects capital and facilitates entry into classes of business that might otherwise be too large or volatile. Coinsurance, in contrast, involves two or more insurers sharing the same original risk directly with the policyholder. Alternative risk transfer (ART) extends the range of solutions beyond conventional insurance and reinsurance through captives, risk-retention groups, insurance pools, finite-risk arrangements, catastrophe bonds and other capital-market instruments.

The central managerial issue is not simply whether risk should be transferred. It is how much risk should be retained, which risks should be transferred, to whom, on what contractual basis, at what price, and with what protection against counterparty or basis risk.

Learning Objectives

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

1. Explain the purpose, functions and terminology of reinsurance.

2. Distinguish facultative from treaty reinsurance and proportional from non-proportional arrangements.

3. Analyse retention, capacity, catastrophe protection, recoveries and counterparty security.

4. Explain the structure and practical use of coinsurance, captives, pools and insurance-linked securities.

5. Evaluate the managerial, financial, regulatory and ethical implications of alternative risk-transfer decisions.

6. Apply these concepts to an insurer’s programme design and risk-management problem.

Reinsurance as a Second-Level Risk Transfer

A reinsurance transaction does not usually alter the policyholder’s contract with the original insurer. The cedant remains responsible to the policyholder for valid claims, while the reinsurer reimburses the cedant according to the reinsurance contract. This distinction is fundamental: reinsurance is generally a contract of indemnity between insurers and does not normally give the insured a direct right against the reinsurer.

Reinsurance performs several connected functions. It increases underwriting capacity by enabling an insurer to accept risks larger than its desired net retention. It smooths fluctuations in claim experience by spreading losses across time, geography and insurers. It protects surplus against severe individual or catastrophe losses. It improves portfolio diversification and may provide technical support, data, underwriting expertise and access to international markets. It can also assist solvency management, although regulatory recognition depends on the applicable legal and prudential framework.

The transfer is not costless or complete. The cedant pays premium, incurs administrative and placement costs, and remains exposed to exclusions, contract limits, reinstatement provisions, claims disputes and reinsurer default. A sound programme therefore balances risk transfer with retention rather than attempting to eliminate every uncertainty.

Essential terminology

The cedant is the insurer transferring risk. The reinsurer accepts the transferred risk. A retrocession is reinsurance purchased by a reinsurer. The retention is the portion of risk or loss kept by the cedant. The cession is the portion transferred. Capacity refers to the maximum amount of risk or loss that a reinsurance arrangement can support. A reinsurance premium is the consideration paid for the cover, while a recovery is an amount received or receivable from the reinsurer for a covered loss.

Other important terms include the ceding commission, paid by a reinsurer under many proportional treaties to compensate the cedant for acquisition and administration expenses; the reinstatement, which restores protection after an aggregate or occurrence limit has been used; the attachment point, where excess-of-loss cover begins; and the limit, the maximum amount payable under a layer. A placing broker may negotiate and administer the arrangement, although the broker is not itself the risk-bearing party.

Facultative and Treaty Reinsurance

The first major distinction concerns the basis on which risks are offered.

Facultative reinsurance

Facultative reinsurance is negotiated separately for an individual risk. The cedant presents detailed information about the property, liability, engineering features, location, occupancy, loss history and proposed terms. The reinsurer may accept, reject or modify the submission.

Facultative cover is appropriate when a risk is unusual, exceptionally large, hazardous, outside the cedant’s treaty terms or likely to create concentration. It allows precise underwriting and pricing. For example, an insurer with a property treaty limit of ₹100 million may seek facultative support for a specialised chemical plant valued at ₹250 million.

Its disadvantages are slower placement, higher transaction costs, possible uncertainty of availability and the risk that the reinsurer declines the submission. Facultative reinsurance may also create operational difficulty when an insurer must obtain support for many individual risks.

Treaty reinsurance

Under a treaty, the reinsurer agrees in advance to accept a defined class or portfolio of risks written by the cedant, subject to the treaty terms. The cedant is usually obliged to cede risks falling within the treaty scope, and the reinsurer is correspondingly obliged to accept them. This is often described as an automatic arrangement.

Treaties reduce transaction time and provide predictable capacity. They are especially useful for homogeneous portfolios such as motor, household, workers’ compensation or standard commercial property. However, the reinsurer relies heavily on the cedant’s underwriting, claims and data-governance practices. Poor portfolio selection or inadequate controls can therefore affect both parties.

Facultative and treaty reinsurance are not mutually exclusive. A cedant may use treaty protection for ordinary business and facultative placements for exceptional or excluded risks. The appropriate choice depends on portfolio homogeneity, size, volatility, underwriting control, information quality and speed of execution.

Proportional and Non-Proportional Structures

A second distinction concerns how premium and losses are shared.

Proportional reinsurance

In proportional reinsurance, the reinsurer receives an agreed proportion of premium and pays the same proportion of each covered loss, subject to the contract. The two common forms are quota share and surplus share.

Under a quota-share treaty, the cedant and reinsurer share every risk in a fixed percentage. If the quota is 40 per cent and a covered claim is ₹10 million, the reinsurer’s share is ₹4 million. The reinsurer also receives 40 per cent of the relevant premium, usually adjusted for commissions. Quota share is simple and provides broad portfolio support, but it transfers profitable as well as unprofitable business and may give the cedant less control over the relationship between retention and risk size.

Under a surplus-share treaty, the cedant retains a fixed amount, called a line, and cedes the amount above that retention up to the treaty capacity. The ceded percentage varies by risk. A ₹5 million retention with four lines can support risks up to ₹25 million. A ₹15 million risk would produce a ceded share of 10/15, or two-thirds, while the cedant retains one-third. Surplus share is more selective than quota share and is useful where insured sums vary substantially.

Proportional arrangements provide premium financing, automatic capacity and relatively predictable sharing. They may, however, expose the reinsurer to the cedant’s underwriting and claims practices and may not provide adequate protection against a single exceptionally severe event unless the relevant risk is ceded in sufficient proportion.

Non-proportional reinsurance

Non-proportional reinsurance responds when losses exceed a specified threshold rather than sharing every loss in a fixed percentage. The principal forms are per-risk excess of loss, catastrophe excess of loss and stop-loss or aggregate excess of loss.

In per-risk excess of loss, the reinsurer pays the amount of an individual risk loss above the cedant’s retention, up to the layer limit. If the retention is ₹10 million and the limit is ₹40 million, a ₹35 million covered loss produces a recovery of ₹25 million, before applying exclusions and other terms.

Catastrophe excess of loss responds to the accumulation of losses from one event, such as a cyclone, earthquake, flood or industrial explosion. It is designed for correlated losses affecting many policies simultaneously. If the layer attaches at ₹100 million and has a limit of ₹300 million, the cedant bears the first ₹100 million of event losses and the reinsurer responds to the next ₹300 million.

Aggregate excess of loss or stop-loss protection responds when total losses during a period exceed an agreed amount or percentage of premium. It protects the annual result against unusually adverse frequency or severity. Aggregate covers require careful definition of subject premium, loss development, reporting periods and aggregate limits.

Non-proportional pricing depends on expected loss cost, exposure volatility, event frequency, severity distribution, capital costs, reinstatements and market conditions. The arrangement gives the cedant greater control over profitable ordinary business but may leave many smaller losses with the cedant.

Designing Retention, Capacity and Catastrophe Protection

Reinsurance programme design begins with the cedant’s risk appetite and financial capacity. Retention should not be chosen solely because it is customary in the market. It should reflect surplus, liquidity, earnings tolerance, solvency objectives, portfolio diversification, claims-paying ability and the cost of reinsurance.

A useful decision process is:

1. Define the portfolio, exposure measures, policy limits and geographic accumulations.

2. Establish the maximum tolerable net loss for one risk, one event and one year.

3. Model expected losses and adverse scenarios, including catastrophe and economic stress.

4. Select retentions that the insurer can fund without threatening operations or regulatory capital.

5. Purchase layers that address the remaining severity and accumulation risk.

6. Test reinsurer security, wording, exclusions, reinstatement capacity and claims procedures.

7. Monitor actual experience and revise the programme as the portfolio changes.

A layered programme may combine a working layer for frequent medium-sized claims, a higher excess layer for severe individual losses, and catastrophe layers for event accumulation. The cedant may also purchase facultative cover above treaty limits. The objective is not necessarily the maximum possible transfer; it is an efficient distribution of risk between the cedant’s balance sheet and external capacity.

Reinstatement provisions are particularly important in catastrophe programmes. If one event exhausts a layer, a paid or free reinstatement may restore some or all of the limit for a later event, usually for an additional premium. Without reinstatement, a cedant may be protected for the first catastrophe but exposed to a second event in the same year.

Recoveries, Claims and Counterparty Risk

The value of reinsurance depends on recoverability. A nominally attractive contract is inadequate if the reinsurer disputes claims, lacks liquidity, becomes insolvent or cannot respond promptly after a catastrophe. Cedants therefore assess financial strength, regulatory status, claims reputation, diversification, collateral arrangements, contract certainty and concentration among reinsurers.

Recovery management begins at underwriting and not only when a claim occurs. Policy and reinsurance definitions should be aligned where appropriate, but the cedant must understand differences in exclusions, notice requirements, aggregation language, hours clauses, event definitions, allocation rules and follow-the-settlements provisions. Claims should be notified promptly, documented and reconciled with ceded premiums, reserves and payments.

A cedant’s gross loss, ceded loss, recoverable amount and net loss should be tracked separately. Recoverables are assets, but their valuation must reflect collectability and the timing of payment. Delayed recoveries can create liquidity pressure even where the ultimate claim is covered. Accounting and regulatory frameworks may impose specific treatment of reinsurance assets, collateral and counterparty default adjustments.

Common causes of recovery disputes include ambiguous event definitions, late notification, inconsistent allocation of expenses, aggregation of multiple losses, non-disclosure of material information and differences between the original policy and the reinsurance contract. Clear wording, disciplined data and documented claims governance are therefore central to reinsurance effectiveness.

Coinsurance: Shared Participation at the Primary Level

Coinsurance occurs when two or more insurers directly share an original risk. One insurer may act as the lead or managing insurer, while each participating insurer assumes a stated percentage. The policyholder ordinarily receives one policy or coordinated policies and pays premium according to the agreed arrangement.

Coinsurance is useful for very large industrial, infrastructure, aviation, marine or energy risks that exceed the capacity or risk appetite of one insurer. It spreads the exposure without requiring one insurer to retain the entire risk and later seek reinsurance. It can also facilitate technical collaboration and local-market participation.

Coinsurance differs from reinsurance in legal structure. In coinsurance, participating insurers are directly involved in the original insurance relationship. In reinsurance, the cedant remains the policyholder’s primary contractual counterparty and transfers risk through a separate agreement. This distinction affects claims handling, disclosure, premium collection, solvency treatment and the policyholder’s rights.

Coinsurance requires careful agreement on leadership, authority, claims settlement, policy wording, premium accounting, commissions, data sharing and disputes. A policyholder may face practical difficulty if participants adopt inconsistent positions. The lead insurer must therefore have clearly defined authority and accountability.

Alternative Risk Transfer

Alternative risk transfer comprises arrangements that combine insurance, finance and capital-market techniques to address risks not efficiently handled by conventional annual insurance.

Captives

A captive is an insurance company established by a parent organisation or group primarily to insure the risks of its owners or affiliated entities. A wholly owned captive may retain predictable frequency losses, access reinsurance markets, centralise risk information and align insurance with the parent’s strategic needs. A group captive may serve several unrelated organisations with similar exposures.

Captives can provide customised coverage, stabilise long-term costs and improve claims data. They require capital, governance, actuarial analysis, regulatory compliance, professional management and disciplined claims administration. A captive is not automatically a method of avoiding risk; it changes the way risk is financed and retained. Fronting insurers may be required where the captive lacks a licence or market access, creating additional fees and counterparty considerations.

Pools and risk-sharing arrangements

Insurance pools combine the exposures or capacity of several insurers to cover risks with high severity, unusual accumulation or public importance. Each participant contributes capacity and shares premiums and losses according to agreed rules. Pools can improve diversification and make coverage available where individual insurers would otherwise withdraw. Their success depends on transparent governance, fair contribution rules, sound underwriting and mechanisms for handling participant default.

Insurance-linked securities

Insurance-linked securities (ILS) transfer insurance risk to capital-market investors. The best-known instrument is the catastrophe bond. A sponsor establishes a special-purpose vehicle that issues notes to investors. The proceeds are held as collateral, and investors receive interest. If a defined catastrophe occurs, some or all of the collateral is used to compensate the sponsor; if not, investors receive the principal at maturity, subject to the terms.

Triggers may be indemnity-based, industry-loss-based, parametric or modelled-loss-based. Indemnity triggers closely reflect the sponsor’s actual losses but require claims verification. Parametric triggers are faster and more transparent but create basis risk: the sponsor may suffer a large loss without the parameter reaching the trigger, or the trigger may be reached while the sponsor’s actual loss is smaller.

ILS can provide multi-year capacity and diversify protection away from traditional reinsurers. They also involve modelling uncertainty, basis risk, transaction costs, collateral management, investor appetite and complex disclosure. They are particularly valuable for peak catastrophe exposures, but they do not replace underwriting discipline.

Applied Illustrative Case: Coastal Shield Insurance

Background

Coastal Shield Insurance is a fictional regional insurer writing commercial property and household business in a coastal market. Its gross written premium has grown rapidly, but a large proportion of its insured values is concentrated in three coastal districts. The board is concerned that one severe cyclone could produce losses exceeding the company’s risk appetite.

Situation and analysis

The insurer currently retains the first ₹25 million of each property loss and has a proportional treaty for part of its portfolio. Its catastrophe programme attaches at ₹150 million and provides a ₹250 million limit. Exposure modelling indicates that a severe cyclone could generate an event loss of ₹520 million. The model also shows that two significant storms could occur in the same annual period.

The gross exposure is not the same as the probable net loss. The proportional treaty will generate recoveries on covered policies, but treaty exclusions, policy deductibles and limits must be considered. The catastrophe layer would respond only after the cedant’s event retention. If the event loss is ₹520 million and the catastrophe cover is ₹250 million excess of ₹150 million, the maximum recovery from that layer is ₹250 million, leaving at least ₹270 million before other recoveries and adjustments.

Strategy

Management takes five steps. First, it improves geographic accumulation data and introduces underwriting controls for high-value coastal properties. Second, it retains the existing proportional support for portfolio capacity but purchases a higher per-risk excess layer for large individual properties. Third, it restructures catastrophe protection into layers with an additional reinstatement. Fourth, it diversifies placements among financially strong reinsurers and establishes collateral or security requirements where appropriate. Fifth, it investigates a parametric catastrophe bond for the most severe cyclone scenarios.

The board rejects a proposal to transfer nearly all risk through expensive quota share because the resulting premium cession would reduce the benefit of profitable ordinary business. It also rejects reliance on the parametric bond alone because basis risk could leave the company underfunded after a severe but geographically irregular storm.

Outcome

The revised programme retains predictable, manageable losses, protects surplus against major individual claims, and increases capacity for a second event. The catastrophe bond provides additional peak protection, while conventional reinsurance remains important for claims that do not satisfy the parametric trigger. The programme costs more than the previous arrangement, but it is better aligned with the company’s exposure, liquidity needs and risk appetite.

Learning points

The case illustrates that programme design requires portfolio data, not merely a comparison of premium quotations. Proportional and non-proportional covers can complement one another. Capacity, attachment points, limits and reinstatements must be assessed together. Finally, diversification of reinsurers and the management of basis and counterparty risk are as important as the headline amount of cover.

Governance, Regulation and Professional Judgement

Reinsurance decisions affect policyholders, shareholders, creditors and regulators. Boards and senior managers should approve a documented reinsurance strategy linked to risk appetite, capital planning and business objectives. Important controls include segregation of underwriting and placement authority, contract-certainty procedures, exposure accumulation monitoring, reinsurer due diligence, recovery reconciliation and independent review of catastrophe models.

Regulatory requirements vary by jurisdiction but commonly address solvency, admissibility of reinsurance recoverables, collateral, concentration, related-party transactions, licensing and reporting. A transaction should not be structured solely to create an appearance of capital relief without genuine transfer of insurance risk. Misrepresentation of exposures, artificial claims arrangements and inadequate disclosure can create legal, regulatory and reputational consequences.

Ethically, insurers must avoid using reinsurance to obscure poor underwriting or to shift risks that they do not understand. Policyholders should not be misled about the identity of the party responsible for claims. Professional judgement is required when models are uncertain, particularly for climate-related perils, emerging risks and low-frequency events.

Technology, Analytics and Emerging Developments

Reinsurance increasingly depends on data architecture, exposure databases, catastrophe models, geospatial analysis and automated treaty administration. Application programming interfaces can support bordereaux exchange, premium calculation and claims notification. Machine-learning tools may improve exposure classification and anomaly detection, but they do not eliminate the need for actuarial validation, explainability and governance.

Current developments include growing use of parametric covers, collateralised reinsurance, ILS, climate-risk modelling, cyber reinsurance and multi-year programmes. Climate change creates challenges for historical-loss models because past frequency and severity may not represent future conditions. Cyber risk is difficult to aggregate and define, encouraging specialised wordings, event-based analysis and alternative structures. Digital platforms may increase placement speed, but standardisation must not replace careful review of exclusions and contract language.

Best Practices for Insurers

A professionally managed programme should:

• link retentions and limits to capital, liquidity and risk appetite;
• combine proportional, non-proportional and facultative protection where appropriate;
• maintain accurate exposure, accumulation and claims data;
• assess reinsurer financial strength and concentration;
• negotiate clear definitions, exclusions, event clauses and reinstatements;
• model gross, ceded and net outcomes under stress scenarios;
• reconcile recoverables promptly and preserve complete claims evidence;
• review basis risk in parametric and index-based covers;
• ensure board oversight, regulatory compliance and contract certainty; and
• test the programme annually against portfolio growth, inflation, climate and emerging risks.

Chapter Summary

Reinsurance transfers part of an insurer’s risk to another insurer and supports capacity, earnings stability, catastrophe protection and capital management. Facultative reinsurance is negotiated risk by risk, whereas treaty reinsurance applies automatically to a defined portfolio. Proportional arrangements share premium and losses by an agreed proportion; non-proportional arrangements respond above specified retentions or aggregate thresholds. Effective programme design depends on retention, capacity, attachment points, limits, reinstatements, portfolio accumulation and reinsurer security.

Coinsurance shares the original risk directly among insurers and differs legally from reinsurance. Alternative risk transfer includes captives, pools, risk-sharing structures and insurance-linked securities. These mechanisms can improve flexibility and access to capital but introduce governance, basis, modelling, liquidity and counterparty risks. The central professional task is to integrate underwriting, actuarial analysis, capital planning, claims governance, regulation and strategic judgement.

Key Terms

Alternative risk transfer: Methods combining insurance, finance or capital-market techniques outside conventional insurance arrangements.

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

Capacity: The maximum amount of risk or loss that an insurer or reinsurance arrangement can support.

Captive insurer: An insurer established mainly to insure the risks of its owner or affiliated entities.

Catastrophe excess of loss: Reinsurance responding to accumulated losses from a defined catastrophic event.

Cedant: The insurer transferring risk to a reinsurer.

Ceding commission: Commission paid by a reinsurer to a cedant, commonly under proportional reinsurance.

Coinsurance: Direct sharing of an original insured risk by two or more insurers.

Facultative reinsurance: Reinsurance individually negotiated for a particular risk.

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

Non-proportional reinsurance: Cover responding when losses exceed specified thresholds rather than sharing each loss proportionally.

Parametric trigger: A predefined measurable event characteristic that activates insurance or reinsurance payment.

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

Recovery: Payment or amount receivable from a reinsurer for a covered loss.

Reinstatement: Restoration of reinsurance capacity after it has been used, usually for an additional premium.

Reinsurance: Transfer of insurance risk from a primary insurer to another insurer.

Retention: The portion of risk or loss kept by the cedant.

Retrocession: Reinsurance purchased by a reinsurer.

Treaty reinsurance: Automatic reinsurance covering a defined class or portfolio of risks.

Basis risk: The risk that an index or parametric trigger does not correspond closely to the sponsor’s actual loss.

Review Questions

Short Answer Questions

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

2. Define facultative reinsurance and state one situation in which it is useful.

3. What is meant by a reinstatement in catastrophe reinsurance?

4. Distinguish coinsurance from reinsurance.

5. What is basis risk in a parametric insurance arrangement?

Long Answer Questions

1. Explain the functions of reinsurance and discuss why a well-capitalised insurer may still require it.

2. Compare quota-share, surplus-share, per-risk excess-of-loss and catastrophe excess-of-loss reinsurance.

3. Discuss the factors that should guide an insurer when selecting retention and capacity.

4. Explain the structure, benefits and limitations of captives and insurance-linked securities.

5. Analyse the importance of recovery management, reinsurer security and contract wording.

Analytical / Application Questions

1. An insurer retains ₹15 million per risk and purchases ₹60 million excess of ₹15 million cover. Calculate the recovery and net retained loss for a covered loss of ₹52 million, ignoring exclusions and expenses. Explain what would happen if the loss were ₹90 million.

2. A regional insurer has a concentrated flood portfolio and limited capital. Design a combination of proportional, catastrophe and alternative risk-transfer solutions, explaining the trade-offs.

3. A parametric bond pays when wind speed exceeds a specified threshold, but a cyclone causes extensive flooding without reaching that wind speed. Evaluate the resulting risk and recommend complementary protection.

22. Multiple Choice Questions with Answers

Question 1

Which feature most clearly distinguishes treaty reinsurance from facultative reinsurance?

A. Treaty reinsurance covers a defined portfolio automatically, while facultative reinsurance is negotiated risk by risk.

B. Treaty reinsurance is always non-proportional, while facultative reinsurance is always proportional.

C. Treaty reinsurance transfers no liability, while facultative reinsurance transfers all liability.

D. Treaty reinsurance can only be used for catastrophe risks.

Correct Answer: A. Treaty reinsurance covers a defined portfolio automatically, while facultative reinsurance is negotiated risk by risk.

Question 2

Under a 40% quota-share arrangement, what is the reinsurer’s share of a covered ₹12 million claim?

A. ₹2.4 million

B. ₹4.8 million

C. ₹7.2 million

D. ₹12 million

Correct Answer: B. ₹4.8 million

Question 3

A per-risk excess-of-loss treaty has a ₹10 million retention and a ₹40 million limit. What is the recovery for a covered ₹35 million loss?

A. ₹10 million

B. ₹25 million

C. ₹35 million

D. ₹40 million

Correct Answer: B. ₹25 million

Question 4

What is the primary purpose of catastrophe excess-of-loss reinsurance?

A. To share every policy premium in a fixed proportion

B. To cover routine small claims below the cedant’s retention

C. To protect against accumulated losses from one catastrophic event

D. To eliminate all underwriting risk from the cedant

Correct Answer: C. To protect against accumulated losses from one catastrophic event

Question 5

Which statement correctly describes coinsurance?

A. It is a contract only between a cedant and a reinsurer.

B. It involves direct sharing of the original risk by multiple insurers.

C. It always transfers risk to capital-market investors.

D. It applies only after a primary insurer becomes insolvent.

Correct Answer: B. It involves direct sharing of the original risk by multiple insurers.

Question 6

Why might an insurer retain predictable frequency losses while purchasing catastrophe reinsurance?

A. To avoid all claims administration

B. To retain manageable losses and protect capital against severe accumulation losses

C. To ensure that every claim is paid by a reinsurer

D. To remove the need for underwriting controls

Correct Answer: B. To retain manageable losses and protect capital against severe accumulation losses

Question 7

Which problem is most specifically associated with a parametric catastrophe trigger?

A. The reinsurer receives no premium.

B. The trigger may not correspond closely to the sponsor’s actual loss.

C. The arrangement cannot be collateralised.

D. The cover always requires individual facultative placement.

Correct Answer: B. The trigger may not correspond closely to the sponsor’s actual loss.

Question 8

A captive insurer is primarily established to:

A. Insure risks of its owner or affiliated entities

B. Replace all regulatory capital requirements

C. Act as a broker for unrelated insurers only

D. Guarantee profits on every insured risk

Correct Answer: A. Insure risks of its owner or affiliated entities

Question 9

Why are reinsurer recoverables subject to counterparty assessment?

A. Because recoverables may be delayed or become uncollectible if the reinsurer experiences financial difficulty.

B. Because recoverables are always excluded from financial statements.

C. Because the cedant has no responsibility to the policyholder.

D. Because reinsurance premiums are paid only after claims.

Correct Answer: A. Because recoverables may be delayed or become uncollectible if the reinsurer experiences financial difficulty.

Question 10

A catastrophe layer attaches at ₹100 million and has a ₹300 million limit. If an event produces ₹520 million of covered losses, what is the maximum recovery from that layer?

A. ₹100 million

B. ₹300 million

C. ₹420 million

D. ₹520 million

Correct Answer: B. ₹300 million