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III IC-71 practice questions

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Question 1Professional Examination subject IC-71 (domain structure not enumerated in source)

Under the IC-71 framework, which document primarily governs the contractual relationship between an insurer and a reinsurer for a specific treaty?

  1. The insurance policy schedule
  2. The reinsurance treaty wording Correct answer.
  3. The regulator's licensing certificate
  4. The broker's placing slip

Explanation

The reinsurance treaty is the contract that sets out the terms, obligations and conditions between cedant and reinsurer for the business covered. Other documents may support placement or regulation but do not themselves create the treaty relationship.

Question 2Professional Examination subject IC-71 (domain structure not enumerated in source)

In IC-71 terms, a cedant is best described as which party?

  1. The broker arranging the placement
  2. The insurer transferring risk to a reinsurer Correct answer.
  3. The reinsurer accepting risk
  4. The regulator supervising the market

Explanation

The cedant is the insurer that cedes, or transfers, part of its risk to a reinsurer under a reinsurance arrangement. The reinsurer assumes that ceded risk, while brokers and regulators perform different roles.

Question 3Professional Examination subject IC-71 (domain structure not enumerated in source)

Which reinsurance arrangement obliges the reinsurer to accept all business that falls within the defined scope of the treaty?

  1. Treaty reinsurance Correct answer.
  2. Co-insurance
  3. Facultative reinsurance
  4. Retrocession

Explanation

Treaty reinsurance is an obligatory agreement under which the cedant must cede and the reinsurer must accept all risks within the defined scope. Facultative cover is offered and accepted risk by risk, so it lacks that automatic obligation.

Question 4Professional Examination subject IC-71 (domain structure not enumerated in source)

A proportional treaty in which the cedant and reinsurer share premiums and losses in fixed percentages is known as which type?

  1. Quota share Correct answer.
  2. Stop loss
  3. Aggregate stop loss
  4. Excess of loss

Explanation

A quota share treaty cedes a fixed percentage of every risk within scope, and premium and losses follow the same percentage. Excess of loss and stop loss arrangements are non-proportional and respond only above a defined threshold.

Question 5Professional Examination subject IC-71 (domain structure not enumerated in source)

In a surplus share treaty, the cedant's retention is usually expressed as which of the following?

  1. A fixed monetary amount per risk
  2. A percentage of the reinsurer's capacity
  3. A loss ratio threshold
  4. A number of lines Correct answer.

Explanation

Surplus share treaties express the cedant's retention as a number of lines, with each line equal to the retention amount, and the reinsurer takes the surplus above it. This lets the cession vary with the size of each risk.

Question 6Professional Examination subject IC-71 (domain structure not enumerated in source)

A cedant retains the first 500,000 of each risk and buys cover for the next 1,500,000. Which description matches this arrangement?

  1. Quota share of 75 percent
  2. Surplus share of three lines
  3. Stop loss at a 75 percent loss ratio
  4. Excess of loss of 1,500,000 in excess of 500,000 Correct answer.

Explanation

A layer of 1,500,000 attaching above a 500,000 retention is the classic excess of loss structure. The reinsurer pays only the portion of each loss that exceeds the retention, up to the limit of the layer.

Question 7Professional Examination subject IC-71 (domain structure not enumerated in source)

Which clause clarifies that the reinsurer's liability follows the terms of the original policies and the fortunes of the cedant?

  1. The follow-the-fortunes clause Correct answer.
  2. The net retention clause
  3. The offset clause
  4. The cut-through clause

Explanation

A follow-the-fortunes clause obliges the reinsurer to follow the cedant's good-faith claim settlements under the original policies. It supports the principle that reinsurance responds to the underlying insurance.

Question 8Professional Examination subject IC-71 (domain structure not enumerated in source)

What is the main purpose of a reinsurance reinstatement provision?

  1. To restore the cedant's regulatory capital
  2. To restore the reinsurance limit after a loss, usually for an additional premium Correct answer.
  3. To reinstate a lapsed broker's authority
  4. To reinstate a cancelled insurance policy

Explanation

Reinstatement provisions allow the reinsurance limit to be restored after it has been reduced by a loss, typically in exchange for an additional premium. They determine how many times and on what terms cover can be replenished.

Question 9Professional Examination subject IC-71 (domain structure not enumerated in source)

A reinsurance treaty states that the reinsurer pays its share of losses without requiring the cedant to pursue the original insured first. Which principle does this reflect?

  1. The reinsurer's liability is separate and follows the cedant's obligation to pay valid claims Correct answer.
  2. The reinsurer is liable only after the cedant becomes insolvent
  3. The reinsurer is liable only for expenses, not indemnities
  4. The reinsurer's liability is direct and primary to the policyholder

Explanation

Reinsurance liability is separate from the direct insurance contract but follows the cedant's obligation to pay valid claims under it. The reinsurer indemnifies the cedant rather than the original policyholder.

Question 10Professional Examination subject IC-71 (domain structure not enumerated in source)

Which term describes the situation where the cedant keeps part of a risk for its own account before ceding the remainder?

  1. Retrocession
  2. Fronting
  3. Retention Correct answer.
  4. Cession

Explanation

Retention is the portion of risk the cedant keeps for its own account. The ceded portion is the cession, while retrocession is reinsurance of a reinsurer's risk and fronting is a different arrangement.

Question 11Professional Examination subject IC-71 (domain structure not enumerated in source)

A cedant wants cover for a single large industrial property that falls outside its treaty scope. Which reinsurance method is most appropriate?

  1. Obligatory treaty
  2. Facultative reinsurance Correct answer.
  3. Aggregate excess of loss
  4. Quota share treaty

Explanation

Facultative reinsurance is arranged risk by risk, making it suitable for individual risks that sit outside treaty scope. Each submission can be separately underwritten and accepted or declined.

Question 12Professional Examination subject IC-71 (domain structure not enumerated in source)

In non-proportional reinsurance, what does the term attachment point refer to?

  1. The premium rate charged for the cover
  2. The maximum the reinsurer will pay
  3. The date on which the treaty begins
  4. The cedant's retention above which the reinsurer becomes liable Correct answer.

Explanation

The attachment point is the loss level, usually the cedant's retention, at which the reinsurer's liability begins. The limit defines how far above that point the reinsurer will pay.

Question 13Professional Examination subject IC-71 (domain structure not enumerated in source)

Which clause allows the original insured to claim directly against the reinsurer if the cedant becomes insolvent?

  1. The cut-through clause Correct answer.
  2. The follow-the-fortunes clause
  3. The inspection of records clause
  4. The currency clause

Explanation

A cut-through clause gives the original insured a direct right of recovery against the reinsurer in specified circumstances such as cedant insolvency. It overrides the usual privity position between reinsurer and policyholder.

Question 14Professional Examination subject IC-71 (domain structure not enumerated in source)

A cedant's claims team settles a doubtful claim generously under a treaty containing a follow-the-fortunes clause. Which statement best reflects the reinsurer's position?

  1. The reinsurer must follow the settlement provided it was made in good faith and within the treaty terms Correct answer.
  2. The reinsurer may refuse any payment it considers excessive regardless of the settlement
  3. The reinsurer is automatically liable for all settlements including those outside the treaty scope
  4. The reinsurer is liable only after a court has approved the settlement

Explanation

Follow-the-fortunes requires the reinsurer to accept the cedant's good-faith settlements that fall within the treaty terms. It does not extend to bad-faith, ex-gratia or out-of-scope payments.

Question 15Professional Examination subject IC-71 (domain structure not enumerated in source)

Which of the following best describes retrocession?

  1. Reinsurance purchased by a reinsurer to protect its assumed risks Correct answer.
  2. The cession of risk by a direct insurer to a reinsurer
  3. The transfer of risk from a policyholder to an insurer
  4. The sharing of a single risk among several direct insurers

Explanation

Retrocession is reinsurance of reinsurance, bought by a reinsurer to protect the risks it has assumed. It sits one level above the original cession in the risk transfer chain.

Question 16Professional Examination subject IC-71 (domain structure not enumerated in source)

A surplus share treaty has a retention of 200,000 per risk and the reinsurer accepts up to four lines. What is the maximum ceded amount for a single risk of 700,000?

  1. 500,000 Correct answer.
  2. 200,000
  3. 800,000
  4. 700,000

Explanation

Four lines at 200,000 each give a maximum cession of 800,000, but the actual cession is limited to the amount above the 200,000 retention. For a 700,000 risk the ceded amount is therefore 500,000.

Question 17Professional Examination subject IC-71 (domain structure not enumerated in source)

What is the primary function of a reinsurance broker in the placement process?

  1. To regulate the solvency of the reinsurer
  2. To settle the original policyholder's claims
  3. To negotiate and place the reinsurance on behalf of the cedant Correct answer.
  4. To assume the ceded risk directly

Explanation

A reinsurance broker acts for the cedant, marketing the programme, negotiating terms and placing the cover with reinsurers. The broker does not assume risk or perform regulatory functions.

Question 18Professional Examination subject IC-71 (domain structure not enumerated in source)

Which term describes the reinsurer's right to share in the cedant's recoveries from third parties responsible for a loss?

  1. Arbitration
  2. Salvage
  3. Contribution
  4. Subrogation Correct answer.

Explanation

Subrogation allows the party that has indemnified a loss to step into the insured's shoes and pursue third parties responsible for it. In reinsurance, the reinsurer shares in recoveries in proportion to its participation.

Question 19Professional Examination subject IC-71 (domain structure not enumerated in source)

A treaty contains a claims control clause rather than a follow-the-fortunes clause. What is the practical effect for the cedant?

  1. The cedant must cede all claims regardless of treaty scope
  2. The cedant may not communicate with the reinsurer about claims
  3. The cedant may settle claims freely and the reinsurer is bound by the outcome
  4. The cedant must notify and obtain the reinsurer's agreement before settling large claims Correct answer.

Explanation

A claims control clause gives the reinsurer a say in the handling and settlement of claims, typically requiring notification and agreement. This contrasts with follow-the-fortunes, where the cedant's good-faith settlements bind the reinsurer.

Question 20Professional Examination subject IC-71 (domain structure not enumerated in source)

Which of the following is a typical reason a cedant purchases reinsurance?

  1. To avoid paying claims to its insureds
  2. To increase its underwriting capacity and stabilise results Correct answer.
  3. To transfer all of its obligations to policyholders
  4. To eliminate the need for regulatory capital

Explanation

Reinsurance increases underwriting capacity, protects against large or cumulative losses and stabilises financial results. It does not remove capital requirements or the cedant's duty to its policyholders.

Question 21Professional Examination subject IC-71 (domain structure not enumerated in source)

In a proportional treaty, what does the ceding commission primarily reimburse?

  1. The policyholder's premium refunds
  2. The broker's regulatory fees
  3. The cedant's acquisition and administrative costs on ceded business Correct answer.
  4. The reinsurer's cost of capital

Explanation

A ceding commission reimburses the cedant for expenses such as acquisition costs and administration incurred on the ceded business. It recognises that the cedant performs the front-end work while the reinsurer receives a share of premium.

Question 22Professional Examination subject IC-71 (domain structure not enumerated in source)

Which statement about the relationship between the direct policy and the reinsurance treaty is correct?

  1. The reinsurance treaty amends the direct policy terms automatically
  2. The reinsurance treaty creates privity between reinsurer and policyholder
  3. The direct policy is void if reinsurance is not in place
  4. The direct policy and the reinsurance treaty are separate contracts Correct answer.

Explanation

The direct insurance contract and the reinsurance treaty are legally separate agreements between different parties. Reinsurance does not alter the policyholder's rights under the original policy.

Question 23Professional Examination subject IC-71 (domain structure not enumerated in source)

What does an aggregate excess of loss cover protect against?

  1. The insolvency of a policyholder
  2. The accumulation of many small losses over a period exceeding a defined threshold Correct answer.
  3. The cedant's investment losses
  4. A single catastrophic event only

Explanation

Aggregate excess of loss responds when the total of losses over a period exceeds a defined retention or loss ratio. It protects against frequency and accumulation rather than a single event.

Question 24Professional Examination subject IC-71 (domain structure not enumerated in source)

A cedant's treaty includes a net retention clause. What does this require the cedant to do?

  1. Retain all of its profits without ceding any premium
  2. Retain the original policyholder's premium
  3. Retain a specified amount of risk for its own account net of other reinsurance Correct answer.
  4. Retain the reinsurer's share of losses

Explanation

A net retention clause requires the cedant to keep a defined amount of risk for its own account, calculated after deducting other reinsurance. This ensures the cedant retains a genuine financial interest in the outcome.

Question 25Professional Examination subject IC-71 (domain structure not enumerated in source)

Which of the following best describes the principle of utmost good faith in reinsurance?

  1. The broker guarantees the reinsurer's performance
  2. Each party must disclose all material facts and deal honestly with the other Correct answer.
  3. The cedant may withhold information that reduces the premium
  4. The reinsurer must always accept the cedant's underwriting decisions

Explanation

Utmost good faith requires each party to disclose material facts and act honestly, because reinsurance relies heavily on the cedant's own underwriting and claims information. Failure can give the affected party remedies under the contract and applicable law.

Question 26Professional Examination subject IC-71 (domain structure not enumerated in source)

An excess of loss treaty covers 1,000,000 in excess of 500,000 per risk. A single risk produces a gross loss of 2,000,000 and the cedant has no other cover. How much does the reinsurer pay?

  1. 1,000,000 Correct answer.
  2. 2,000,000
  3. 1,500,000
  4. 500,000

Explanation

The reinsurer pays only within the layer between the attachment point (500,000) and the exhaustion point (1,500,000). A 2,000,000 loss therefore produces 1,000,000 of recovery, and the cedant absorbs the retention plus the amount above the layer. The layer does not respond to losses below 500,000 at all.

Question 27Professional Examination subject IC-71 (domain structure not enumerated in source)

Which reinsurance arrangement is transacted for one specific risk and normally terminates when that risk expires?

  1. Quota share treaty
  2. Facultative reinsurance Correct answer.
  3. Surplus share treaty
  4. Aggregate excess of loss treaty

Explanation

Facultative reinsurance is negotiated risk by risk, with the reinsurer free to accept or decline each submission and to set its own terms. Treaties, by contrast, cover a defined class or portfolio automatically. Facultative cover is therefore the natural vehicle for a single unusual or large risk.

Question 28Professional Examination subject IC-71 (domain structure not enumerated in source)

What does the reinsurance term 'cession' describe?

  1. The period allowed for the cedant to notify a claim
  2. The portion of a risk that the cedant transfers to the reinsurer Correct answer.
  3. The right of the reinsurer to inspect the cedant's records
  4. The premium the reinsurer returns to the cedant as commission

Explanation

A cession is the act and the amount of transferring risk from the cedant to the reinsurer. The word is used both for the transaction and for the share ceded on a particular risk. Ceded premium and ceded liability both flow from that transfer.

Question 29Professional Examination subject IC-71 (domain structure not enumerated in source)

Which party is the 'cedent' in a reinsurance transaction?

  1. The insurer that transfers part of its risk to a reinsurer Correct answer.
  2. The broker placing the treaty
  3. The original policyholder who bought the direct policy
  4. The reinsurer accepting the transferred risk

Explanation

The cedant is the direct insurer that cedes risk to a reinsurer and remains the party facing the original insured. It keeps the direct policy obligations intact while recovering part of its exposure under the treaty. The reinsurer is the assuming party.

Question 30Professional Examination subject IC-71 (domain structure not enumerated in source)

Which statement best describes a quota share treaty?

  1. The cedant cedes all losses above a stated retention per risk
  2. The cedant cedes only amounts exceeding its own retention line by line
  3. The cedant cedes a fixed percentage of every risk within the treaty scope Correct answer.
  4. The cedant cedes only risks that it chooses to submit individually

Explanation

In a quota share treaty the cedant and reinsurer share premium and losses in a fixed proportion on every risk falling within the treaty. The share is not tied to the size of the risk. This makes the treaty simple to administer and gives the cedant proportional relief across the whole portfolio.

Question 31Professional Examination subject IC-71 (domain structure not enumerated in source)

What is the principal purpose of a reinsurance slip?

  1. To calculate the cedant's regulatory solvency margin
  2. To list the original insureds covered by the treaty
  3. To set out the terms of the reinsurance offered to underwriters for subscription Correct answer.
  4. To record the claims paid by the cedant during the year

Explanation

The slip is the placement document that summarises the risk, the cover sought and the proposed terms for subscribing reinsurers. Each underwriter signs for a share and is bound by the slip terms. It becomes the basis of the treaty wording that follows.

Question 32Professional Examination subject IC-71 (domain structure not enumerated in source)

Which term describes the cedant's own share of a risk that it keeps before any reinsurance responds?

  1. Recovery
  2. Commission
  3. Retention Correct answer.
  4. Cession

Explanation

Retention is the amount or proportion of risk the cedant keeps for its own account. It applies before reinsurance responds and is the cedant's first loss in both proportional and non-proportional structures. Retention is sometimes called the deductible in excess of loss business.

Question 33Professional Examination subject IC-71 (domain structure not enumerated in source)

Which of these is a non-proportional reinsurance structure?

  1. Quota share
  2. First surplus
  3. Excess of loss Correct answer.
  4. Surplus share

Explanation

Excess of loss is non-proportional because the reinsurer's payment depends on the size of the loss rather than a fixed share of the risk. The cedant retains losses up to the attachment point and the reinsurer pays the excess within the layer. Quota and surplus share are proportional structures.

Question 34Professional Examination subject IC-71 (domain structure not enumerated in source)

A quota share treaty has a 40% cession and the cedant writes a risk with a premium of 250,000. Ignoring commission, what premium is ceded to the reinsurer?

  1. 100,000 Correct answer.
  2. 150,000
  3. 250,000
  4. 40,000

Explanation

Under a quota share the ceded premium is the fixed cession percentage applied to the gross premium. Here 40% of 250,000 is 100,000. The cedant keeps the remaining 150,000 of premium and bears the same 60% share of losses.

Question 35Professional Examination subject IC-71 (domain structure not enumerated in source)

A surplus share treaty has a retention of 100,000 and the reinsurer accepts up to six lines. What is the maximum sum insured the treaty can cover in full?

  1. 700,000 Correct answer.
  2. 1,000,000
  3. 100,000
  4. 600,000

Explanation

Retention plus the reinsurer's capacity gives the total treaty capacity. Six lines of 100,000 is 600,000 of reinsurance capacity, which added to the 100,000 retention gives 700,000. Risks above that figure need facultative or other additional cover.

Question 36Professional Examination subject IC-71 (domain structure not enumerated in source)

What does a risk attaching basis mean for a reinsurance treaty?

  1. Only risks located in the stated territory are covered
  2. All losses occurring during the treaty period are covered whatever the original policy dates
  3. Only losses notified during the treaty period are covered
  4. All policies incepting during the treaty period are covered, and losses under them fall to that treaty whenever they occur Correct answer.

Explanation

Under risk attaching, the treaty that is in force when the original policy incepts takes the risk for its whole duration. A long-tail loss arising years later still falls to that treaty year. This contrasts with losses occurring cover, which responds according to the date of the loss event.

Question 37Professional Examination subject IC-71 (domain structure not enumerated in source)

A cedant wants to reduce the volatility of small, frequent attritional losses across a whole class of business. Which structure is most appropriate?

  1. A single large facultative placement on one key risk
  2. A stop loss treaty with a very high attachment
  3. A working excess of loss treaty over a low attachment point Correct answer.
  4. A catastrophe excess of loss treaty

Explanation

Working excess of loss cover attaches low and responds to frequency losses, smoothing the cedant's result on ordinary claims activity. A catastrophe layer is designed for single-event severity, not attritional frequency. Facultative cover addresses one nominated risk only.

Question 38Professional Examination subject IC-71 (domain structure not enumerated in source)

Which clause in a proportional treaty obliges the reinsurer to accept its share of risks that the cedant writes within the treaty scope?

  1. The errors and omissions clause
  2. The obligatory or automatic acceptance clause Correct answer.
  3. The offset or set-off clause
  4. The ex gratia payments clause

Explanation

The obligatory clause, often paired with the cedant's obligation to cede, makes the treaty automatic for business within scope. It gives the cedant certainty of cover and the reinsurer a spread of the defined portfolio. Facultative business, by contrast, is accepted risk by risk.

Question 39Professional Examination subject IC-71 (domain structure not enumerated in source)

A treaty includes a 'losses occurring during' basis. A claim event happens on 15 December in treaty year one but is reported in February of treaty year two. Which treaty year responds?

  1. Treaty year one, because the loss occurred during that period Correct answer.
  2. Neither year, because the claim was not reported in the same period
  3. Treaty year two, because the claim was reported in that period
  4. Both years, sharing the loss equally

Explanation

Losses occurring cover is triggered by the date of the loss event, not the date of notification. The December event therefore falls to treaty year one even though it was reported later. Reporting delay does not shift the loss to the following treaty year.

Question 40Professional Examination subject IC-71 (domain structure not enumerated in source)

What is the function of a reinsurance treaty's territorial scope clause?

  1. It determines the commission rate payable to the cedant
  2. It fixes the currency in which claims are settled
  3. It defines the geographic area in which covered risks must be located or losses must arise Correct answer.
  4. It sets the maximum number of reinstatements available

Explanation

The territorial clause limits the treaty to risks situated in, or losses arising in, defined countries or regions. Business outside that area is not automatically covered and needs separate placement. This protects the reinsurer from exposures it did not intend to assume.

Question 41Professional Examination subject IC-71 (domain structure not enumerated in source)

A cedant is concerned that a single natural catastrophe could produce many claims from one event. Which treaty feature addresses this aggregation?

  1. A premium reserve or deposit clause
  2. A ceding commission clause
  3. An event limit or hours clause defining what constitutes one catastrophe occurrence Correct answer.
  4. A net retention clause

Explanation

Catastrophe cover needs a clear definition of a single event so that many individual claims can be aggregated into one occurrence. The hours clause fixes the period during which losses count as one event. This prevents each separate claim from being treated as an independent loss under the layer.

Question 42Professional Examination subject IC-71 (domain structure not enumerated in source)

Which statement correctly distinguishes coinsurance from reinsurance?

  1. Coinsurance requires the insured's consent, while reinsurance also requires the insured's consent
  2. Coinsurance involves several insurers each directly liable to the insured for a share, while reinsurance is a separate contract between insurers Correct answer.
  3. Coinsurance is only used for life business, while reinsurance is only used for property
  4. Coinsurance transfers risk to a party outside the original contract, while reinsurance does not

Explanation

In coinsurance the original insured has a direct relationship with each participating insurer for its share. Reinsurance is a contract between the cedant and the reinsurer to which the original insured is generally not a party. The insured's rights therefore differ materially between the two arrangements.

Question 43Professional Examination subject IC-71 (domain structure not enumerated in source)

A treaty provides for three reinstatements at 100% additional premium pro rata. After the first full layer loss, what is the position?

  1. One reinstatement is used, restoring the layer for a further full amount subject to the additional premium Correct answer.
  2. The retention is reduced by half for the remainder of the treaty period
  3. The layer is exhausted permanently and no further cover is available
  4. The cedant must renegotiate the entire treaty before any further loss is paid

Explanation

Reinstatement provisions restore the reinsured amount after a loss, usually in return for an additional premium calculated pro rata to the amount and time remaining. With three reinstatements the layer can be restored three times. Consuming one reinstatement leaves two available.

Question 44Professional Examination subject IC-71 (domain structure not enumerated in source)

A cedant buys excess of loss cover of 2,000,000 in excess of 1,000,000. A loss of 900,000 occurs. What does the reinsurer pay?

  1. 900,000, the full loss
  2. 2,000,000, the full layer
  3. 1,000,000, the attachment point
  4. Nothing, because the loss is below the attachment point Correct answer.

Explanation

The layer only responds once a loss exceeds the attachment point of 1,000,000. A 900,000 loss falls entirely within the cedant's retention. The reinsurer's liability begins only for the amount by which a loss exceeds the attachment point.

Question 45Professional Examination subject IC-71 (domain structure not enumerated in source)

Why does a reinsurer typically require a retention to be maintained by the cedant in a non-proportional treaty?

  1. To satisfy the original insured's contractual rights against the reinsurer
  2. To ensure the cedant retains a financial interest in controlling and settling losses prudently Correct answer.
  3. To increase the premium volume available to the reinsurer
  4. To remove the need for any claims notification to the reinsurer

Explanation

A meaningful retention keeps the cedant exposed to loss and therefore motivated to underwrite carefully and handle claims prudently. Without it, the cedant might settle claims generously at the reinsurer's expense. The retention is a form of alignment of interest between the parties.

Question 46Professional Examination subject IC-71 (domain structure not enumerated in source)

A cedant cedes 30% of a risk under a quota share treaty and the reinsurer pays a 25% ceding commission on ceded premium. Ceded premium is 300,000. What commission is payable?

  1. 300,000
  2. 75,000 Correct answer.
  3. 90,000
  4. 25,000

Explanation

Ceding commission is calculated on the ceded premium at the agreed rate. Here 25% of 300,000 is 75,000. The commission reimburses the cedant for acquisition and administration costs it has already incurred on the ceded business.

Question 47Professional Examination subject IC-71 (domain structure not enumerated in source)

A cedant operates a quota share treaty and a per risk excess of loss treaty on the same portfolio. A large loss occurs. In what order do the covers normally respond?

  1. The quota share responds first on the gross loss, and the excess of loss then applies to the cedant's retained share Correct answer.
  2. Only the excess of loss responds, because proportional cover is suspended for large losses
  3. The excess of loss responds first, then the quota share on the net retained balance
  4. Both treaties respond simultaneously to the same gross loss without any ordering

Explanation

Where proportional and non-proportional covers are combined, the usual practice is for the quota share to take its share of the gross loss first. The excess of loss then protects the cedant's net retained portion. The treaty wording should always be checked, because the agreed order can vary.

Question 48Professional Examination subject IC-71 (domain structure not enumerated in source)

A reinsurer suspects that the cedant settled a claim outside the terms of the original policy and wants to challenge it. Which treaty provision most affects the reinsurer's ability to do so?

  1. The territorial clause
  2. The currency clause
  3. The premium payment clause
  4. The follow-the-settlements clause Correct answer.

Explanation

A follow-the-settlements clause binds the reinsurer to the cedant's good faith settlement of claims under the original policies. It limits the reinsurer's ability to reopen the merits of a claim it has already funded. Exceptions usually apply where the cedant has acted fraudulently or in bad faith.

Question 49Professional Examination subject IC-71 (domain structure not enumerated in source)

Which situation most clearly indicates that facultative reinsurance is preferable to treaty cover for a cedant?

  1. The cedant wants automatic cover for all routine household policies
  2. The cedant wants to smooth small attritional losses across its motor portfolio
  3. The cedant wants to share all its commercial property business in a fixed proportion
  4. The cedant has a single risk whose sum insured exceeds the capacity of its surplus treaty Correct answer.

Explanation

Facultative placement allows the cedant to obtain additional capacity for a risk that falls outside or above its treaties. A risk exceeding surplus treaty capacity cannot be fully covered automatically. The cedant therefore places the excess facultatively with one or more reinsurers.

Question 50Professional Examination subject IC-71 (domain structure not enumerated in source)

A treaty is written on a 'losses occurring' basis with a catastrophe hours clause of 72 hours. Two storms hit the same region 48 hours apart, causing losses. What is the usual effect?

  1. The losses fall within one 72-hour period and are normally aggregated as a single occurrence Correct answer.
  2. Each storm is treated separately because they are distinct meteorological events
  3. The second storm is excluded entirely because the layer is already exhausted
  4. The hours clause applies only to man-made events, not storms

Explanation

The hours clause groups losses arising from one event within the stated period into a single occurrence. Where two storms fall inside the same 72-hour window, the losses are usually aggregated. This affects how the retention and layer apply to the combined amount.