Question Bank
IC-85- Reinsurance.
CHAPTER 1- INTRODUCTION
Questions-
Q1) What is the Nature of Reinsurance?
Ans-
a) Law of Large Numbers
b) Contract of Indemnity- Protects the insurer from a diminution of his property, caused by
insurance policy obligations.
Q2) How Reinsurance works for Insurers in perspective of ‘Law of Large Numbers’?
Ans- The economic basis of insurance is that the occurrence of loss affects a fraction of a large
population. The larger the population of insured assets or persons or interests, the accuracy of
probability of loss keeps improving.
Insurance companies have to be prepared to accept the risk associated with various scenarios such as:
i. Catastrophes like earthquake, tsunami or
ii. Accumulation of many losses or
iii. Simple lack of financial capacity
The above brings out the crucial role of reinsurance in addressing the limitations to the law of large
numbers, preserving the income from investment and insulating shareholders` funds from unpredictable
loss scenarios.
Q3) Define ‘Follow the fortune’ clause.
Ans- Following the Fortunes — the clause in a reinsurance contract stating that it is the reinsurer's duty
to "follow the fortunes" of the insured as if the reinsurer were a party to the original insurance.
Q4) What are the factors which influence the results of Reinsurance?
Ans- These are-
(a) Risk emanating from the insured (Original risks)-
I. Technical risk- Real risks covered under the policy.
II. Contractual risk- exaggerated or fraudulent claim.
(b) Risks emanating from the Insurer or Reinsurer-
I. Deficient underwriting methods,
II. Excessive generosity in claims settlement
III. Hasty development of business and inefficient technical attention
IV. Moral hazard inherent in all human undertaking.
(c) Risks beyond the control of the contractual parties-
I. Rate of exchange risks
II. Inflation
(d) Utmost good faith- In automatic or Treaty reinsurance this principle is of utmost importance. The
reinsurer gives the insurer automatic underwriting power and therefore renounces any possibility of
refusing risks he does not like. For this reason, the cedant must provide the reinsurer with detailed
information on his portfolio both during the negotiations preliminary to the conclusion of the treaty and
then for the period of its validity.
This trust is extended to the underwriting of risks, the settlement of claims and the determination of
retentions and cessions. It is also understood that the insurer will not modify his underwriting policy or
the tariffs agreed upon without previous notice.
(e) Insolvency of the ceding Insurer- In such a case, reinsurer has to pay his full share of loss as agreed
in the treaty.
The reinsurer only follows the ceding insurer`s fortunes from a technical point of view, as stipulated in
the treaties. The reinsurer only shares the “insurance fate”- in other words, he is not affected by the
insurer’s “commercial fate”.
(f) Insolvency of the Reinsurer- In such a case, Insurance company has to bear all costs relating to its
claims obligation, as there no contract exist b/w the Insured and the Reinsurer.
Q5) The relation between the insurer and the reinsurer is based on the principle of .
I. Causa proxima
II. Subrogation
III. Uberrima fides
IV. Insurable interest
Ans- Uberrima fides.
Q6) In the history of marine insurance the oldest known reinsurance contract was concluded
in______.
Ans- In 1370 in Genoa.
Q7) List timelines with regard to formation of Reinsurance worldwide.
Ans.- Below are the list of some early Reinsurer-
Reinsurer Origin Established
The Cologne Reinsurance company Germany 1846
(Now, merged with GenRe) (Operation started in 1852)
Swiss Reinsurance Company Switzerland 1863
Munich Re Switzerland 1880
The Mercantile and General England 1917
Q8) Write down important timelines in Reinsurance industry in India.
Ans-
Year Event
1956 Indian Reinsurance Corporation
(Formed by GI Cos operating in India)
1961 Govt. made compulsory ceding by Insurers as –
Fire and Marine Cargo 20%
Marine Hull and Misc Insurance (other than Credit and Solvency) 10%
Credit and Solvency Insurance 5%
Above ceding were to be done in following two reinsurers in equal share-
(a) India Reinsurance Corporation
(b) Indian Guarantee and General Insurance Company
1966 Reinsurance pools for Fire and Hull
Created by Indian Insurance companies association
Specified percentage was to be ceded by member cos.
Ceding was to be done in above mentioned two reinsurers.
1971 Numbers of participating Insurers in India were as follows-
Domestic Insurers- 63
Foreign Insurers- 44
Each of them had their own Reinsurance arrangements.
1973 Above mentioned Insurers were reconstituted into Four Companies-
(a) National Insurance Co. Ltd.
(b) The New India Assurance Co. Ltd.
(c) The Oriental Fire and General Insurance Co. Ltd. (now known as Oriental Insurance
Insurer Ltd.)
(d) United India Fire and General Insurance Co. Ltd. (now known as United India
Insurance Insurer Ltd.)
The above four cos. are subsidiaries of GIC Re (General Insurance Corporation of India.
Q9) What is ‘SWIFT’?
Ans- SWIFT is an acronym for "Single Window International Facultative and Treaty". GIC uses this as a
platform to accept all Non-Reciprocal Inward, for itself and for its four subsidiaries, into India. It was
formed in 1991 at GIC.
Q10) Who frames rules and regulations for various aspects of the Reinsurance business?
(a) IRDAI (b) GIC (c) Govt.
Ans- IRDA.
Q11) Validate the statement ‘ Each insurer in India is free to structure his annual reinsurance
programme in compliance with regulations and solvency requirements’.
Ans- True.
Q12) How much Cessions are allowed to accept by (Re)Insurers operating in India to conduct
Reinsurance business?
Ans- Receiving cessions equal to or not exceeding 10% of all premium ceded overseas, subject to a
maximum of 20%.
Q13) What are the pools managed by GIC Re?
Ans- Below mentioned pools are administered by GIC Re-
(a) Indian Motor TP Declined Pool.
(b) Indian Terrorism Insurance Pool.
(C) Indian Marine Hull Insurance Pool.
(d) Nuclear Insurance Pool.
(e) FAIR Nat Cat (Natural Catastrophe) Pool.
Q14) As a sole reinsurer in the domestic reinsurance market, GIC Re provides reinsurance to the direct
general insurance companies in the Indian market. GIC Re receives statutory cession of ________ % on
each and every policy subject to certain limits.
Ans- (a) For all classes of business (except b)- 5% Obligatory (Statutory) cessions subject to higher limits
on each class.
(b) For Terrorism Risk- 100% is required to cede to the pool.
Q15) Which of the following companies became Indian reinsurer after nationalisation?
I. GIC
II. National Insurance Co. Ltd
III. The New India Assurance Co Ltd
IV. The Oriental Fire and General Insurance Co. Ltd.
Ans- GIC
Q16) What are the functions of Reinsurance?
Ans- These are-
(a) Increased Capacity- It helps Insurers to cover risks of complex nature, high value and concentration.
(b) Financial Stability- It provides cushion to Insurers against large losses arising out of single or series of
claims.
(c) Stabilisation of Claims Ratio
(d) Accumulation of claims under different classes.
(e) Spread of risks- By arranging reinsurance, Insurers can spread it business to untested areas also.
(f) Stabilise profitability.
(g) Other functions-
I. Helps insurers consider unusual proposals which he normally would not underwrite.
II. Insurers gets Reinsurer expertise on areas like Technical, Rating and Underwriting, Actuarial,
Reserving, Claims handling, etc.
III. Helps to absorb newer risks exposures arising from Economic/Social Changes, Changes in
Insurance methods, and, Changes caused by Scientific Developments.
IV. It helps Insurers to get exposure of International Insurance markets and their way of working.
Q17) Which of the following is incorrect with respect to advantages of reinsurance?
I. The net premiums and losses are stabilised over a shorter period of time
II. An insurer cannot accept new and untested risk exposures with reinsurance
III. The incidence of loss gets widely distributed
IV. The problem of accumulation within each line of business and between different lines is
controlled.
Ans- Option II.
Q18) Validate the statements-
(a) The reinsurer only shares the “insurance fate” in other words; he is not affected by the insurer’s
“commercial fate”.
(b) The relation between the insurer and the reinsurer is based on the principle of “Uberrima fides”,
i.e. utmost good faith.
(c) The first reinsurance contract in fire insurance business was concluded in 1821.
Ans- All are true.
Q19) What is the obligation of a reinsurer when the ceding insurer is in financial difficulties or is
insolvent?
I. Reinsurer shares commercial fate, hence reinsurer will have to pay his full share of the same loss
II. Reinsurer shares insurance fate, hence reinsurer will have to pay his full share of the same loss
III. Reinsurer shares insurance fate, hence reinsurer will not have to pay his share of the same loss
IV. Reinsurer shares commercial fate, hence reinsurer will not have to pay his full share of the same
loss
Ans- Option II.
Q20) In 1966, the Indian Insurance Companies Association initiated the formation of Reinsurance Pools
in country.
I. Marine
II. Fire and Hull
III. Vehicle
IV. Health
Ans- Fire and Hull.
Q21) The first reinsurance contract in fire insurance business was concluded in.
I. 1821 II. 1853 III. 1863 IV. 1880
Ans- 1821.
CHAPTER 2
FORMS OF REINSURANCE
Questions-
Q1) What are the forms of Reinsurance?
Ans- These are shown in the below figure-
Q2) What is Facultative Reinsurance? In what circumstances this method is used by the Insurer?
Ans- Facultative Reinsurance- a reinsurance contract under which the ceding insurer has the option to
cede and the reinsurer has the option to accept a specific risk of a specific insured.
Facultative reinsurance may be transacted on:
a) Proportional or
b) Non-proportional basis.
This method is used-
a) To reinsure hazardous risks not protected by treaty arrangements,
b) To reduce the liability to treaty reinsurers on certain risks;
c) To reduce the insurer’s liability in a certain area;
d) To provide extra capacity and
e) To obtain the reinsurer’s advice on doubtful risks.
Q3) Which of the following is correct with respect to facultative reinsurance?
I. Ceding insurer does not have the option to cede in facultative reinsurance
II. Ceding reinsurer has the option to cede in a facultative reinsurance
III. Reinsurer does not have the option to accept facultative reinsurance
IV. Reinsurer does not have the option to decline risk of insurance company.
Ans- Option II.
Q4) What is Treaty Reinsurance?
Ans- Treaty Reinsurance- an agreement between the original insurer and reinsurer whereby the
reinsurer automatically accepts a certain liability for all risks falling within the scope of the agreement.
Treaty reinsurance may be transacted on
a) Proportional or
b) Non-proportional basis.
Q5) Explain ‘Treaty Reinsurance is an obligatory contract’.
Ans- Treaty reinsurance is an obligatory contract in which each party foregoes certain rights such as-
a) the reinsurer may not decline risks falling within the scope of the agreements and
b) the insurer must allow all risks coming within the scope to be covered.
Q6) What wordings are used in the Treaty Reinsurance agreement?
Ans- A formal treaty wording is usually drawn up by the parties to describe:
a) the monetary limits and mode of operation;
b) the classes of business covered, the territorial scope, the risks excluded;
c) the calculation and payment of claims, the calculation and payment of premiums and the period of
agreement.
Q7) Define the term ‘Retrocession’.
Ans- When a reinsurance company reinsures another reinsurance company, the process is known as
Retrocession.
Q8) ABC is a reinsurance company. It gets into a contract with another reinsurance company: XYZ
Reinsurance Co. Ltd. Such contracts between two reinsurance companies are known as
I. Facultative reinsurance
II. Treaty reinsurance
III. Retrocession
IV. Facultative obligatory reinsurance
Ans- Retrocession.
Q9) What is Facultative Obligatory Treaty?
Ans- Facultative Obligatory Treaty- a contract of reinsurance whereby the ceding insurer may cede risks
of any agreed class of insurance which the reinsurer must accept if ceded.
This form is therefore a combination of facultative and treaty forms. One would come across such
arrangement in life reassurance.
This form of treaty is used to:
a) To arrange automatic additional capacity for surplus after exhausting existing automatic
arrangements for reinsurance cessions.
b) To facilitate writing of high value exposures or to deal with high accumulation.
c) Where net retention is lowered on account of the degree of hazard this would back up the additional
capacity as required.
Q10) __________is a contract of reinsurance whereby the ceding insurer may cede risks of any agreed
class of insurance which the reinsurer must accept if ceded.
I. Facultative reinsurance
II. Treaty reinsurance
III. Facultative obligatory reinsurance
IV. Retrocession
Ans- Facultative obligatory reinsurance.
Q11) Which of the following forms of reinsurance, reinsures risks on individual basis?
I. Facultative
II. Retrocession
III. Treaty reinsurance
IV. Facultative obligatory treaty
Ans- Facultative.
Q12) In which of the following reinsurance contracts does the ceding insurer have the option to cede
and the reinsurer have the option to accept a specific risk of a specific insured?
I. Facultative
II. Retrocession
III. Treaty reinsurance
IV. Facultative obligatory treaty
Ans- Facultative.
Q13) In which of the following reinsurance contract insurer needs to obtain reinsurance coverage
before accepting to insure a client?
I. Facultative
II. Retrocession
III. Treaty reinsurance
IV. Facultative obligatory treaty
Ans- Facultative
Q14) Which of the following forms of reinsurance is used to arrange automatic additional capacity for
the surplus after exhausting the existing automatic arrangements for reinsurance cessions?
I. Facultative
II. Retrocession
III. Treaty reinsurance
IV. Facultative obligatory treaty
Ans- Option IV.
Q15) Which of the following forms of reinsurance is used to facilitate writing of high value exposures
or to deal with high accumulation?
I. Facultative
II. Retrocession
III. Treaty reinsurance
IV. Facultative obligatory treaty
Ans- Option IV.
CHAPTER 3
METHODS OF REINSURANCE - I
Proportional Reinsurance
Questions-
Q1) What are the methods of Reinsurance?
Ans- As we know there are two forms of Reinsurance viz. Facultative and Treaty, both of these are done
with two methods, which are-
(a) Proportional
(b) Non- Proportional
Q2) What is Proportional reinsurance?
Ans- In Proportional Reinsurance, the Reinsurer shares Liabilities of the Insurer along with Sum Insured,
Premiums and Claims in the same proportion as agreed in the Treaty.
Proportional reinsurance is of two types-
(a) Surplus reinsurance, and,
(b) Quota Share reinsurance.
Q3) How Proportional reinsurance helps Insurers in their business?
Ans- Proportional reinsurance method, if carefully structured, helps Insurers-
(a) To improve and stabilize Net Retained Loss Ratio over a period of time.
(b) Additional Earnings- Ceding commission exceeds actual acquisition cost and expense.
(c) Improve Combined Ratio.
Q4) What is ‘Surplus Reinsurance’ within the part of Proportional Reinsurance?
Ans- Definition can be understood from the below points-
(a) Insurer decides what part of the insurance he wishes to retain and rest are ceded to a Reinsurer.
(b) Premium : Losses :: Retention : Ceding. It means Premium and Losses are shared in the same
proportion to Insurer’s Retention and Insurer’s Ceding (Risk bear by the Reinsurer) of the Risk.
Q5) What is ‘Line’ as used in Surplus Reinsurance?
Ans- A ceding insurer`s retention out of sum insured for itself is called a “line”.
Q6) What are the ways to decide Surplus Limit to be reinsured by the Insurer?
Ans- There are two ways in which the limits of surplus can be stated-
(a) Sum Insured
(b) Probable Maximum Limit (PML)- It is used to decide ‘What should be the Max. Loss for any
particular risk’ that the Insurer is willing to Retain and the rest are Reinsured. This method adds
efficiency to retention.
Let’s understand above two methods with following e.g.-
An Insurer is insuring a Fire Risk for an manufacturing unit with S.I of Rs.50,00,000. Here, Insurer’s
Max. retention for any Fire Risk is Rs. 10,00,000. Insurer assuming that the loss this unit can suffer is
Max. 60% of the S.I. Premium for this is fixed at Rs. 10,000.
Solution- (a) SI- Rs.50,00,000. (b) Retention Limit- Rs.10,00,000. (c) PML- Rs.30,00,000 (60% of SI).
Surplus to be reinsured and Retention decided under both methods are as follows-
Sum Insured Method PML Method
S.I Insurer’s Surplus PML Insurer’s Surplus
Retention Reinsured Retention Reinsured
50,00,000 10,00,000 (20%) 40,00,000 (80%) 30,00,000 10,00,000 20,00,000
(33.33%) (66.67%)
Premium sharing under S.I Method. Premium sharing under PML Method
Total Insurer Share Reinsurer Share Total Insurer Share Reinsurer
Premium Premium Share
Rs. 10,000 2,000 (20%) 8,000 (80%) Rs.10,000 3333 (33.33%) 6667 (66.67%)
Explanation Steps-
(a) Under PML method, Insurer works out on Maximum possible loss for determining its retention and
Premium sharing. Whereas, In S.I method, these two are based on Total Sum Insured.
(b) Sum Insured remains the same under PML method also. Means, if there’s a case of TL then Insured
will be reimbursed with full S.I.
(c) If PML calculation turns inadequate and loss exceeds the total PML, then Insurer will be paying that
Extra part and for that he will not be reimbursed by the Reinsurer as premium was not shared.
(d) PML helps retaining greater premium comparing to SI method as mentioned in above eg.
Q7) Define ‘Quota Share Reinsurance’ within Proportional Reinsurance.
Ans- There are two types under Quota Share to decide Insurer’s retention and ceding. These are-
(a) Fixed Quota Share
(b) Variable Quota Share.
Q8) Define Fixed Quota Share.
Ans- In Fixed Quota Share method the Reinsurer assumes a fixed percentage of each risk and shares all
premiums and losses accordingly.
E.g- If an Insurer retains 10% and cedes 90% to Reinsurer. Calculation is as in table-
SI 100000 400000
Ceding Insurer Retention (10%) 10000 40000
Reinsurer (90%) 90000 360000
Q9) What is Variable Quota Share?
Ans- In this method the Retention % varies for different limit of Sum Insured. For eg. Retention %
decrease with Increase in Sum Insured. This is done to reduce the retention % for higher risk exposure.
It can be understood from below table-
SI 100000 500000 1000000
Retention 30% 20% 10%
Ceding Insurer 30000 100000 100000
Reinsurer 70000 400000 900000
