Reinsurance

An insurer's automatic reinsurance TREATY covers standard cases up to a set limit. The insurer now has an application far above that limit on a heavily rated applicant. To place the excess risk, it will most likely use:

1. A.Retention, keeping the full amount on its own booksRetention is the amount the insurer keeps. It is the opposite of placing the excess risk elsewhere.
2. B.Facultative reinsurance, submitting this individual case to a reinsurer for case-by-case considerationCorrect. Facultative placement is how insurers handle risks their treaties do not automatically cover.
3. C.A reinsurance certificate issued directly to the applicantReinsurance is a contract between two insurers. The applicant is not a party to it and has no rights under it.
4. D.Its automatic treaty, which obligates the reinsurer to accept any case submittedA treaty obligates the reinsurer only within its agreed class and limits, and this case sits outside both.

Why: Treaty (automatic) reinsurance covers an agreed class of business within agreed limits, and the reinsurer must take whatever falls inside it. Facultative reinsurance is negotiated case by case: the ceding insurer submits the individual file and the reinsurer decides whether and on what terms to accept. Unusual, oversized or heavily rated cases go the facultative route. The clue is that the case falls outside the treaty. Review: reinsurance.

A life insurer cedes to another insurer all mortality risk above $2 million on any single life, under a standing agreement covering its whole book automatically. This arrangement is:

1. A.Treaty reinsurance covering the book automatically above the retention limitCorrect. Automatic class coverage defines the treaty form.
2. B.Prohibited risk-shiftingWrong. Reinsurance is a regulated, essential industry practice.
3. C.Facultative reinsurance negotiated per policyWrong-but-tempting. Facultative is the CASE-BY-CASE opposite.
4. D.Coinsurance with policyholdersWrong. Policyholder cost-sharing is a health-insurance concept.

Why: Treaty reinsurance automatically covers all risks of a defined class under a master agreement, while facultative reinsurance is individually offered and accepted per risk; retention limits above which risk is ceded are standard. Citation: reinsurance fundamentals. Takeaway: standing/automatic = treaty; case-by-case = facultative.