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Question 1General Insurance and Reinsurance Knowledge

Under the principle of indemnity, what is the maximum amount an insurer will pay on a fire policy covering a building whose reinstatement value is INR 2 crore but whose market value at the time of loss is INR 1.2 crore, where the sum insured is INR 1.5 crore?

  1. INR 2 crore, the full reinstatement cost of the building
  2. INR 2.7 crore, the sum insured plus a proportional addition
  3. INR 1.2 crore, the actual amount of the loss measured by the market value Correct answer.
  4. INR 1.5 crore, the sum insured stated in the policy schedule

Explanation

Indemnity restores the insured to the financial position held immediately before the loss, so recovery is capped at the actual loss suffered. Where the property is insured for more than its market value, the insured cannot profit; the loss measured at INR 1.2 crore is the ceiling. The sum insured is only the outer limit of cover, not an automatic entitlement.

Question 2General Insurance and Reinsurance Knowledge

Which of the following is the correct definition of reinsurance?

  1. A scheme under which policyholders share losses of an insurer through mutual contribution
  2. Insurance of the insurer, whereby one insurer assumes part of the risk accepted by another insurer Correct answer.
  3. A contract under which an insurer collects premiums on behalf of a government pool
  4. A deposit arrangement where an insurer pledges reserves with the regulator

Explanation

Reinsurance is the transfer of risk from a ceding insurer (the reinsured) to a reinsurer in return for a share of premium. It is essentially insurance for insurers and does not alter the original policyholder's contract. The cedent remains liable to the policyholder for the full sum insured.

Question 3General Insurance and Reinsurance Knowledge

In a surplus treaty, a cedent retains INR 10 lakh per risk and cedes up to nine lines. A single risk is insured for INR 1.2 crore. How is the excess above the treaty capacity handled?

  1. The surplus treaty reduces the sum insured to INR 1 crore and the policy is endorsed accordingly
  2. The balance is shared equally between the cedent and the reinsurer as a coinsurance arrangement
  3. The treaty automatically absorbs the full INR 1.2 crore because the risk is a single unit
  4. The balance of INR 20 lakh must be retained by the cedent or covered by facultative reinsurance Correct answer.

Explanation

A nine-line surplus on a retention of INR 10 lakh gives automatic capacity of INR 1 crore. Any amount above that capacity is not covered by the treaty and must be retained, placed facultatively, or covered by a further treaty. The treaty does not expand to absorb the excess.

Question 4General Insurance and Reinsurance Knowledge

Which type of reinsurance is best described as covering the aggregate of all losses above a stated retention during a defined period, regardless of the number of events?

  1. Stop-loss reinsurance Correct answer.
  2. Facultative reinsurance
  3. Quota share reinsurance
  4. Per-risk excess of loss reinsurance

Explanation

Stop-loss (excess of loss ratio) reinsurance protects the cedent's overall loss ratio or aggregate losses above an agreed threshold in a period. It responds to the accumulation of many losses rather than to a single event. Per-risk and proportional covers respond differently.

Question 5General Insurance and Reinsurance Knowledge

A proportional treaty contains a 'reinsurer's loss participation clause' requiring the reinsurer to pay its share of a loss even if the cedent has not yet paid the policyholder. What is the principal purpose of such a clause?

  1. To accelerate cash flow to the cedent so that it can settle the underlying claim promptly Correct answer.
  2. To limit the reinsurer's liability to losses already paid by the cedent
  3. To convert the proportional treaty into a non-proportional one for large losses
  4. To transfer the claims-handling decision entirely to the reinsurer

Explanation

Loss participation or cash-loss clauses allow the cedent to recover the reinsurer's share before or simultaneously with payment of the claim. This supports liquidity when large losses occur. It does not change the nature of the treaty or shift claims control.

Question 6General Insurance and Reinsurance Knowledge

What is the key characteristic of a 'claims made' liability policy compared with an 'occurrence' policy?

  1. It requires the insured to admit liability before cover applies
  2. It responds to claims first made against the insured during the policy period, subject to any retroactive date Correct answer.
  3. It responds to injuries or damage that occur during the policy period, whenever the claim is reported
  4. It covers only claims notified after the policy has expired

Explanation

A claims-made policy is triggered by the making of the claim during the period of insurance, usually with a retroactive date limiting cover for earlier acts. An occurrence policy is triggered by the date of the injurious event. This distinction matters greatly for professional indemnity and D&O covers.

Question 7General Insurance and Reinsurance Knowledge

An insured's factory is destroyed by fire and the insurer pays the claim. The insurer then discovers the fire was caused by the negligence of a neighbouring contractor. What right does the insurer exercise?

  1. Salvage, selling the damaged remains to reduce the loss
  2. Contribution, seeking a share of the loss from another insurer covering the same property
  3. Utmost good faith, avoiding the policy for non-disclosure
  4. Subrogation, stepping into the insured's legal position to recover from the third party Correct answer.

Explanation

Subrogation transfers to the insurer, after indemnifying the insured, the insured's rights of recovery against the party responsible for the loss. It supports the principle of indemnity by preventing double recovery. Contribution and salvage are distinct doctrines.

Question 8General Insurance and Reinsurance Knowledge

In marine insurance, which of the following losses is a 'particular average' loss?

  1. A partial loss suffered by one cargo owner and borne by that owner alone Correct answer.
  2. A total loss of the vessel by sinking
  3. A voluntary sacrifice of cargo to save the ship and remaining cargo
  4. A loss shared proportionately by all parties to the adventure

Explanation

Particular average is an accidental partial loss borne by the individual interest affected, unlike general average which is shared. It is not a total loss. The distinction determines who bears the cost of the loss.

Question 9General Insurance and Reinsurance Knowledge

Under a fire insurance policy, which of the following is normally covered as a 'fire' peril?

  1. Damage caused by a fire that escapes from a fireplace and burns the contents of the room Correct answer.
  2. Damage caused by lightning without any resulting fire
  3. Damage caused solely by smoke from an industrial process in a neighbouring premises
  4. Damage caused by spontaneous fermentation without ignition

Explanation

Fire insurance covers damage caused by actual ignition, including accidental escape of fire from its intended place. Spontaneous fermentation without ignition, damage by smoke alone from an external process, and lightning without fire are not fire losses.

Question 10General Insurance and Reinsurance Knowledge

What is the principal function of the Insurance Regulatory and Development Authority of India (IRDAI) in relation to reinsurance?

  1. Setting the premium rates for every reinsurance treaty
  2. Underwriting all reinsurance business in India directly
  3. Regulating reinsurance operations, including registration of Indian reinsurers and oversight of foreign reinsurance branches Correct answer.
  4. Acting as the sole reinsurer for all general insurance risks

Explanation

IRDAI is the sector regulator responsible for licensing and supervising insurers and reinsurers operating in India, including foreign reinsurance branches. It does not underwrite business itself or fix individual treaty rates. Its role is prudential and market-conduct regulation.

Question 11General Insurance and Reinsurance Knowledge

A cedent has a quota share treaty ceding 40% of every risk. It also has a per-risk excess of loss treaty protecting its net retention above INR 50 lakh. For a single risk of INR 3 crore, what is the cedent's net retention after the quota share?

  1. INR 50 lakh, being the retention under the excess of loss treaty
  2. INR 1.8 crore, which is then protected by the excess of loss treaty above INR 50 lakh Correct answer.
  3. INR 3 crore, because the quota share does not reduce the sum insured
  4. INR 1.2 crore, which is fully retained without any excess of loss protection

Explanation

A 40% quota share leaves the cedent with 60% of the risk, i.e. INR 1.8 crore. The excess of loss treaty then protects that retention above INR 50 lakh. The excess of loss is applied to the cedent's net retained amount.

Question 12General Insurance and Reinsurance Knowledge

Which principle requires an insured to disclose all material facts that would influence a prudent underwriter's decision, even if not asked?

  1. Utmost good faith Correct answer.
  2. Proximate cause
  3. Insurable interest
  4. Indemnity

Explanation

Utmost good faith (uberrimae fidei) obliges the insured to volunteer material facts at proposal. Insurable interest concerns the legal relationship to the subject matter, proximate cause concerns the dominant cause of loss, and indemnity concerns restoration of financial position.

Question 13General Insurance and Reinsurance Knowledge

An insured holds two fire policies on the same property, each with a sum insured of INR 50 lakh. A loss of INR 40 lakh occurs. Under the doctrine of contribution, how is the loss shared?

  1. The insured recovers INR 40 lakh from the first policy and also INR 40 lakh from the second
  2. Only the first policy responds, and the second policy is void
  3. Each insurer pays INR 20 lakh, sharing the loss in proportion to the sums insured Correct answer.
  4. Each insurer pays INR 40 lakh, giving the insured a total of INR 80 lakh

Explanation

Contribution requires insurers covering the same interest to share a loss proportionately, preventing the insured from recovering more than the actual loss. With equal sums insured, each pays half. The insured cannot profit from multiple policies.

Question 14General Insurance and Reinsurance Knowledge

What does the term 'proximate cause' mean in insurance claims?

  1. The cause that the insured believes to be most important
  2. The last event that occurred before the loss was discovered
  3. The cause that is closest in time to the reporting of the claim
  4. The dominant, effective cause of a loss, determined by a common-sense chain of events Correct answer.

Explanation

Proximate cause is the dominant and effective cause that sets the loss in motion, assessed by common sense rather than strict chronology. It determines whether the loss falls within the insured perils. Remote or incidental causes are disregarded.

Question 15General Insurance and Reinsurance Knowledge

In a facultative reinsurance arrangement, which statement is correct?

  1. The cedent offers and the reinsurer accepts each risk individually, and either party may decline Correct answer.
  2. The reinsurer must accept all risks that fall within the treaty's scope
  3. The cedent must cede all risks of the specified class automatically
  4. The arrangement covers only aggregate losses above a retention

Explanation

Facultative reinsurance is negotiated risk by risk, giving both parties freedom to offer, accept, or decline. This contrasts with treaty reinsurance, which obliges the reinsurer to accept risks falling within its terms. Facultative placement suits unusual or large risks.

Question 16General Insurance and Reinsurance Knowledge

A motor third-party liability policy in India is compulsory. What is the principal social purpose of compulsory motor third-party insurance?

  1. To protect the insured's own vehicle against accidental damage
  2. To ensure that innocent victims of road accidents can recover compensation from a solvent insurer Correct answer.
  3. To guarantee a profit for the insurer on every motor policy
  4. To reduce the premium collected by insurers

Explanation

Compulsory third-party cover exists to protect victims of road accidents by ensuring compensation is available. It does not cover the insured's own vehicle damage, which requires own-damage cover. The purpose is social protection rather than insurer profitability.

Question 17General Insurance and Reinsurance Knowledge

Under a health insurance policy, what does the 'waiting period' typically refer to?

  1. The time taken by the insurer to settle a claim after documents are received
  2. A period after inception during which specified illnesses or pre-existing conditions are not covered Correct answer.
  3. The period during which the policyholder may cancel the policy without penalty
  4. The interval between premium due dates

Explanation

A waiting period is a specified time after policy inception before cover applies to certain conditions, particularly pre-existing diseases. It controls anti-selection. It is distinct from the claim settlement turnaround time and the free-look period.

Question 18General Insurance and Reinsurance Knowledge

What is the main purpose of a catastrophe excess of loss treaty?

  1. To cover the cedent's ordinary attritional losses on a per-risk basis
  2. To share every individual risk proportionally with the reinsurer
  3. To provide facultative cover for a single large industrial risk
  4. To protect the cedent against the aggregation of many losses arising from a single catastrophic event Correct answer.

Explanation

Catastrophe excess of loss responds when losses from one event, such as an earthquake or cyclone, exceed an agreed retention. It addresses accumulation risk rather than individual large risks. Per-risk excess of loss and proportional treaties serve different purposes.

Question 19General Insurance and Reinsurance Knowledge

Which of the following best describes 'insurable interest' in life insurance?

  1. The policyholder must own property belonging to the life insured
  2. The policyholder must be a relative of the life insured in every case
  3. The policyholder must have an insurable interest at the time of the insured's death
  4. The policyholder must have a financial or legal relationship with the life insured at inception Correct answer.

Explanation

In life insurance, insurable interest must exist at inception, such as a spouse, employer, or creditor relationship. It need not exist at the time of death, unlike property insurance where interest is required at the time of loss. Mere ownership of property is not the test.

Question 20General Insurance and Reinsurance Knowledge

What is the function of a 'retrocession' in reinsurance?

  1. A reinsurer transfers part of its assumed risk to another reinsurer Correct answer.
  2. An insurer returns premium to a policyholder
  3. A broker places a risk directly with the original insured
  4. A cedent cancels a treaty before its expiry

Explanation

Retrocession is reinsurance of a reinsurer, used to spread risk further and protect the reinsurer's own capital. It operates at a level above the original cession. It is not a cancellation or a return of premium.

Question 21General Insurance and Reinsurance Knowledge

An insurer's underwriting year results show a combined ratio of 112%. What does this indicate?

  1. Underwriting operations produced a loss, since claims and expenses exceeded earned premiums Correct answer.
  2. The insurer made an underwriting profit of 12%
  3. The insurer's investment income exceeded its claims
  4. The insurer's solvency ratio improved by 12%

Explanation

The combined ratio compares incurred losses and expenses with earned premiums. A ratio above 100% means underwriting produced a loss before investment income. It does not measure investment performance or solvency directly.

Question 22General Insurance and Reinsurance Knowledge

Which of the following is a characteristic of a 'treaty' reinsurance arrangement?

  1. The reinsurer is obliged to accept all risks falling within the agreed class and terms Correct answer.
  2. The reinsurer may decline individual risks within the treaty scope
  3. The treaty applies only to losses above an aggregate retention
  4. Each risk is separately offered and accepted by the reinsurer

Explanation

A treaty obliges the reinsurer to accept all business within its defined scope, and the cedent is usually obliged to cede its share. This automatic mechanism distinguishes it from facultative placement. Aggregate excess of loss is a type of treaty, not a definition of treaty itself.

Question 23General Insurance and Reinsurance Knowledge

A general insurer writes a large property risk and places 30% with a reinsurer under a quota share treaty. A loss of INR 80 lakh occurs. How much does the reinsurer bear, ignoring any deductibles?

  1. INR 24 lakh, being 30% of the loss Correct answer.
  2. Nothing, because quota share treaties do not respond to losses
  3. INR 80 lakh, because the reinsurer is liable for the whole loss
  4. INR 56 lakh, being the cedent's retained share

Explanation

Under a proportional quota share, the reinsurer bears the same percentage of losses as it receives of premiums. Thirty per cent of INR 80 lakh is INR 24 lakh. The cedent retains the remaining 70%.

Question 24General Insurance and Reinsurance Knowledge

What is the purpose of a 'reinstatement' provision in a non-proportional reinsurance treaty?

  1. To reinstate the cedent's retention after each claim
  2. To restore the reinsurance cover after a loss, usually on payment of an additional premium Correct answer.
  3. To reinstate the original policy after cancellation by the insured
  4. To reinstate a lapsed treaty automatically at renewal

Explanation

After a loss exhausts part of the excess of loss layer, a reinstatement provision allows the cover to be restored, often for an additional premium calculated pro rata. This protects the cedent against a second event in the same period. It does not concern the original policy or the retention.

Question 25General Insurance and Reinsurance Knowledge

Which of the following statements about the 'duty of disclosure' under a commercial insurance proposal is correct?

  1. The insured's duty ends once the first premium is paid
  2. The insured must disclose material facts that a prudent insurer would consider relevant to accepting or rating the risk Correct answer.
  3. The insured may withhold facts that would increase the premium
  4. The insured need disclose only facts specifically asked about in the proposal form

Explanation

The duty of disclosure requires the insured to reveal material facts, whether or not a question is asked. Facts that would affect acceptance or rating must be disclosed. Withholding such facts can allow the insurer to avoid the policy.

Question 26General Insurance and Reinsurance Knowledge

Under a proportional facultative reinsurance certificate, what is the standard basis on which the reinsurer shares in a loss on the ceded risk?

  1. The reinsurer pays the full loss and then recovers the cedent's share from the insured
  2. The reinsurer pays only amounts above the cedent's net retention
  3. The reinsurer pays a fixed monetary amount stated in the certificate regardless of loss size
  4. The reinsurer pays the same percentage of the loss as its percentage share of the ceded sum insured Correct answer.

Explanation

Facultative proportional reinsurance operates on the same proportional basis as the underlying policy: the reinsurer accepts a stated percentage of the sum insured and therefore pays the same percentage of any loss. There is no deductible or retention layer in a pure proportional arrangement, because the cedent retains the unceded percentage itself.

Question 27General Insurance and Reinsurance Knowledge

In a non-proportional excess of loss treaty, what does the term 'subject premium' (or 'premium income') base represent?

  1. The premium the reinsurer charges its retrocessionaires
  2. The investment income earned on the cedent's reserves
  3. The total claims paid by the cedent in the previous year
  4. The gross net premium income of the cedent on the classes covered, used to calculate the reinsurance premium rate Correct answer.

Explanation

Excess of loss premiums are usually expressed as a rate applied to a defined premium base, commonly gross net premium income for the covered classes, with deductions such as cancellations specified in the treaty. This base links the reinsurer's premium to the volume of business actually exposed.

Question 28General Insurance and Reinsurance Knowledge

A cedent's surplus share treaty has a retention of INR 10 lakh per risk and nine lines. A risk with a sum insured of INR 1 crore is written. How is the sum insured allocated?

  1. The cedent retains INR 10 lakh and cedes INR 90 lakh to the treaty Correct answer.
  2. The cedent retains INR 10 lakh and the balance is automatically facultative
  3. The cedent retains INR 1 crore and cedes nothing
  4. The cedent retains INR 50 lakh and cedes INR 50 lakh

Explanation

In a surplus share treaty the cedent retains a fixed monetary amount per risk, called the line or retention, and cedes the excess up to the number of lines purchased. Here one line is INR 10 lakh and nine lines cover INR 90 lakh, exactly absorbing the INR 1 crore sum insured.

Question 29General Insurance and Reinsurance Knowledge

Which clause in a reinsurance treaty allows the reinsurer to follow the cedent's underwriting and claims decisions, provided those decisions are made in good faith and in a businesslike manner?

  1. The inspection of records clause
  2. The follow-the-settlements clause Correct answer.
  3. The arbitration clause
  4. The offset clause

Explanation

The follow-the-settlements clause obliges the reinsurer to accept the cedent's good-faith claim settlements as binding, recognising that the reinsurer does not handle the original claim. It is balanced by the cedent's duty to act in a businesslike manner and to keep the reinsurer informed.

Question 30General Insurance and Reinsurance Knowledge

An underwriter is assessing a petrochemical plant and notes a large concentration of values at a single location. Which reinsurance structure most directly addresses the risk of one event affecting the entire sum insured at that site?

  1. An aggregate stop loss treaty
  2. A whole account quota share treaty
  3. A casualty clash treaty
  4. A per-risk excess of loss treaty Correct answer.

Explanation

A per-risk excess of loss treaty protects the cedent against the severity of a single risk, so the loss from one site's total destruction is capped at the retention. Quota share spreads premium and loss proportionally but does not cap the net amount at risk on a single property.

Question 31General Insurance and Reinsurance Knowledge

In insurance accounting, what does 'earned premium' represent at a given point in time?

  1. The portion of written premium that corresponds to the cover already provided Correct answer.
  2. The premium due but not yet received from brokers
  3. The premium collected in cash during the period
  4. The premium returned to policyholders on cancellation

Explanation

Premium is earned as the policy period elapses, because the insurer has provided cover for that elapsed time. The unearned portion is held as a liability, the unearned premium reserve, and is released to income as cover is provided.

Question 32General Insurance and Reinsurance Knowledge

A fire policy has an average (underinsurance) condition. The sum insured is INR 60 lakh and the value at risk at the time of loss is INR 80 lakh. A loss of INR 20 lakh occurs. Assuming full compliance with the condition, what amount is payable?

  1. INR 10 lakh
  2. INR 15 lakh Correct answer.
  3. INR 16 lakh
  4. INR 20 lakh

Explanation

The average condition reduces the claim in the proportion that the sum insured bears to the value at risk: 60/80 multiplied by the INR 20 lakh loss equals INR 15 lakh. The insured bears the shortfall because the premium paid covered only three-quarters of the exposure.

Question 33General Insurance and Reinsurance Knowledge

Which of the following best describes the operation of the principle of subrogation after an insurer has indemnified an insured for damage caused by a negligent third party?

  1. The insured must pursue the third party and share any recovery with the insurer
  2. The insurer steps into the insured's legal position and may recover the amount paid from the third party Correct answer.
  3. The third party's liability is transferred to the insurer, which becomes the defendant
  4. The insurer's liability is extinguished once the third party is identified

Explanation

Subrogation transfers to the insurer, to the extent of its payment, the insured's right of action against the party responsible for the loss. It supports the indemnity principle by preventing the insured from recovering twice and by placing the ultimate burden on the wrongdoer.

Question 34General Insurance and Reinsurance Knowledge

An insured deliberately sets fire to its own insured stock to claim the money. Which principle most directly defeats the claim?

  1. Indemnity, because the stock was overvalued
  2. Insurable interest and public policy, because a person cannot benefit from its own deliberate wrongful act Correct answer.
  3. Contribution, because other insurers may be liable
  4. Utmost good faith, because the loss was not disclosed

Explanation

An insured cannot recover for a loss it has deliberately and wrongfully caused, since that would offend public policy and reward crime. Insurable interest is also affected, as the law does not recognise a right to profit from one's own arson.

Question 35General Insurance and Reinsurance Knowledge

In a coinsurance clause of a large commercial property policy, what is the practical effect when the insured carries insurance equal to or above the stated percentage of value?

  1. The insurer waives all deductibles
  2. The policy is automatically converted to a valued policy
  3. The insured receives a penalty reduction in the claim
  4. Claims are settled in full without applying the average reduction Correct answer.

Explanation

A coinsurance clause requires the insured to insure to a specified percentage of value, often 80% or 90%, in return for a reduced rate. If that requirement is met at the time of loss, the average reduction is not applied and the claim is paid in full subject to the sum insured.

Question 36General Insurance and Reinsurance Knowledge

Which of the following is the primary reason insurers use proportional treaties rather than writing all business net?

  1. To eliminate the need for any underwriting assessment
  2. To guarantee a profit on every risk written
  3. To avoid compliance with solvency regulations
  4. To increase underwriting capacity and share large risks while obtaining reinsurance commission Correct answer.

Explanation

Proportional treaties enlarge the cedent's capacity to accept business and spread exposure, and the reinsurer typically pays a ceding commission to cover acquisition costs. They do not remove the need for underwriting or guarantee results.

Question 37General Insurance and Reinsurance Knowledge

A cedent has a surplus share treaty with a retention of INR 5 lakh and four lines. A proposed risk has a sum insured of INR 40 lakh. What must the cedent do to accept the whole risk?

  1. Cede the entire risk facultatively
  2. Retain INR 5 lakh, cede INR 20 lakh to the treaty and arrange facultative cover for the remaining INR 15 lakh Correct answer.
  3. Decline the risk because it exceeds treaty capacity
  4. Increase the treaty retention to INR 40 lakh

Explanation

The treaty capacity is the retention plus four lines, that is INR 5 lakh plus INR 20 lakh, giving INR 25 lakh. The INR 15 lakh excess above treaty capacity must be placed facultatively or covered by another facility if the cedent wishes to accept the full risk.

Question 38General Insurance and Reinsurance Knowledge

What is the principal purpose of a catastrophe load in property reinsurance pricing?

  1. To cover the cost of routine small claims
  2. To pay reinsurance brokers' commissions
  3. To finance the cedent's marketing expenses
  4. To fund the expected cost of severe, low-frequency accumulation events such as earthquakes or cyclones Correct answer.

Explanation

Catastrophe loading reflects the expected loss from rare events that affect many risks at once, which ordinary frequency-based rating does not capture. It is estimated from catastrophe models and historical experience and is a significant element of property excess of loss pricing.

Question 39General Insurance and Reinsurance Knowledge

An insurer's loss ratio is 68% and its expense ratio is 32%. What does the combined ratio of 100% indicate?

  1. The insurer is insolvent
  2. The insurer's claims exceeded its premium
  3. The insurer broke even on underwriting before any investment income Correct answer.
  4. The insurer made an underwriting profit of 32%

Explanation

The combined ratio adds the loss ratio to the expense ratio, so 68% plus 32% equals 100%, meaning underwriting results exactly break even. Any profit then depends on investment income on reserves and capital.

Question 40General Insurance and Reinsurance Knowledge

Which statement correctly distinguishes a 'treaty' from a 'facultative' reinsurance arrangement?

  1. A treaty is arranged after a loss, while facultative is arranged before inception
  2. A treaty is always proportional, while facultative is always non-proportional
  3. A treaty covers only one risk at a time, while facultative covers a whole portfolio
  4. A treaty obliges the reinsurer to accept all business within its defined scope, while facultative cover is offered and accepted risk by risk Correct answer.

Explanation

A treaty is an automatic agreement under which the cedent must cede and the reinsurer must accept all business falling within the defined scope. Facultative reinsurance is negotiated individually, giving either party the freedom to offer or decline each risk.

Question 41General Insurance and Reinsurance Knowledge

In a reinsurance treaty, what is the function of a 'retention' (or 'priority') in an excess of loss agreement?

  1. It is the amount of each loss the cedent bears before the reinsurer responds Correct answer.
  2. It is the amount of premium the cedent must pay the reinsurer
  3. It is the commission the reinsurer pays the cedent
  4. It is the maximum amount the reinsurer will pay for all losses in a year

Explanation

The retention, also called the priority or deductible, is the cedent's own share of each loss under a non-proportional treaty. The reinsurer pays the excess above that amount, up to the limit of the layer.

Question 42General Insurance and Reinsurance Knowledge

An insured's building is damaged by fire, and the insured also holds a separate policy covering the same building against the same peril. Which principle governs how the two insurers share the indemnity?

  1. Proximate cause
  2. Utmost good faith
  3. Contribution Correct answer.
  4. Subrogation

Explanation

Contribution allows an insurer that has paid more than its rateable share to recover the excess from other insurers covering the same interest against the same peril. It supports indemnity by ensuring the insured receives no more than the actual loss.

Question 43General Insurance and Reinsurance Knowledge

What is the effect of a 'non-cancellable' guarantee in a long-term life reinsurance treaty?

  1. The cedent may terminate at will without notice
  2. The treaty automatically renews at the reinsurer's discretion
  3. The cedent must cede all future business regardless of its terms
  4. The reinsurer cannot terminate the treaty except for non-payment of premium, giving the cedent rate stability Correct answer.

Explanation

Non-cancellable terms protect the cedent from adverse renewal terms or withdrawal by the reinsurer, typically in exchange for a higher initial premium. The reinsurer retains limited rights to terminate for causes such as non-payment.

Question 44General Insurance and Reinsurance Knowledge

Under a marine cargo policy, which of the following losses would typically be treated as a 'general average' contribution?

  1. Loss caused by the inherent vice of the goods
  2. Theft of goods from a warehouse after discharge
  3. Damage to one consignment caused by rough handling during loading
  4. Jettisoning part of the cargo to save the ship and remaining cargo from a common peril Correct answer.

Explanation

General average is a voluntary sacrifice or extraordinary expenditure incurred to preserve the ship and cargo from a common peril, and the loss is shared proportionately among all parties saved. Jettisoning cargo to lighten a stranded vessel is the classic example.

Question 45General Insurance and Reinsurance Knowledge

What is the principal distinction between a 'claims-made' and an 'occurrence' basis in professional indemnity insurance?

  1. Claims-made responds to claims first made during the policy period, while occurrence responds to acts or events occurring during the policy period whenever the claim is made Correct answer.
  2. Claims-made policies are limited to bodily injury claims
  3. Occurrence policies never cover claims made after expiry
  4. Claims-made covers only claims notified before inception

Explanation

Under claims-made cover the trigger is the making of the claim during the period, often with a retroactive date limiting cover for earlier acts. Occurrence cover is triggered by the act or event within the period, regardless of when the claim is later presented.

Question 46General Insurance and Reinsurance Knowledge

An insurer writes a policy with a deductible of INR 1 lakh and a loss of INR 80,000 occurs. How does the deductible apply?

  1. The deductible is carried forward to the next claim
  2. The insurer pays INR 20,000
  3. The insurer pays INR 80,000 and recovers the deductible later
  4. No indemnity is payable because the loss is below the deductible Correct answer.

Explanation

A deductible is the first amount of each loss borne by the insured, so a loss below the deductible produces no payment. Deductibles are not normally carried forward or aggregated unless the wording expressly provides for it.

Question 47General Insurance and Reinsurance Knowledge

Which of the following best explains why reinsurers require a 'cut-through' endorsement in certain fronting arrangements?

  1. To prevent the insured from ever claiming against the cedent
  2. To reduce the reinsurer's liability to nil
  3. To convert proportional reinsurance into non-proportional
  4. To allow the reinsurer to pay the insured directly if the cedent becomes insolvent Correct answer.

Explanation

A cut-through clause gives the insured or the cedent a direct right of recovery against the reinsurer in specified circumstances, typically the cedent's insolvency. It is used where the cedent acts largely as a fronting carrier and the reinsurer bears the substantive risk.

Question 48General Insurance and Reinsurance Knowledge

What is the main purpose of an insurer maintaining an unearned premium reserve?

  1. To cover the cost of acquiring new business
  2. To pay dividends to shareholders
  3. To recognise premium relating to cover not yet provided, so that income is matched to the exposure period Correct answer.
  4. To fund claims already reported but not yet paid

Explanation

The unearned premium reserve holds the portion of written premium that relates to the unexpired period of cover. It ensures revenue is recognised as cover is provided and that liabilities are not understated at the reporting date.

Question 49General Insurance and Reinsurance Knowledge

In a proportional treaty, what is the effect of a 'ceding commission' paid by the reinsurer to the cedent?

  1. It increases the net cost of reinsurance to the cedent
  2. It replaces the reinsurance premium
  3. It reimburses the cedent for acquisition and administration costs and reduces the net cost of the cession Correct answer.
  4. It is a penalty for poor underwriting results

Explanation

A ceding commission returns part of the reinsurance premium to the cedent to recognise the expenses it incurred in acquiring and servicing the business. The net cost of the cession is therefore the ceded premium less the commission, subject to profit commission arrangements.

Question 50General Insurance and Reinsurance Knowledge

A cedent's aggregate stop loss treaty covers 110% of the subject premium, with a limit of 30% of subject premium. If subject premium is INR 10 crore and total retained losses are INR 12.5 crore, what is the reinsurer's payment?

  1. INR 2.5 crore
  2. Nil
  3. INR 1.5 crore Correct answer.
  4. INR 3 crore

Explanation

The attachment point is 110% of INR 10 crore, that is INR 11 crore, and the cover limit is 30% of premium, that is INR 3 crore. Retained losses of INR 12.5 crore exceed the attachment by INR 1.5 crore, which is within the limit and is payable by the reinsurer.