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Difficulty: HardReinsurance Concepts

Match the following operational scenarios and legal obligations to the correct reinsurance concept or entity.

  • Treaty ReinsuranceAutomatically transfers a specific class of risks to a secondary carrier under a pre-negotiated, binding agreement.
  • Facultative ReinsuranceInvolves individual underwriting where the secondary carrier retains the right to accept or reject a specific, unique risk.
  • RetrocessionOccurs when an assuming reinsurer transfers a portion of its own accepted risks to another reinsurance entity.
  • Ceding InsurerRetains the sole contractual privity with the original policyholder and remains legally obligated to pay the full claim.

Answer

Treaty Reinsurance matches with automatic transfer; Facultative Reinsurance matches with individual underwriting; Retrocession matches with a reinsurer transferring risk; Ceding Insurer matches with retaining sole contractual privity.
Each reinsurance term describes a specific operational or legal function. Facultative and Treaty dictate 'how' the risk is transferred (individually vs. automatically). Retrocession describes 'who' is transferring risk in a secondary chain. The ceding insurer defines the 'legal boundary', maintaining the unbroken contract with the consumer.

Step-by-Step Solution

1
Analyze the method of risk transfer to distinguish between automatic agreements and individual negotiations.
Identify that automatic transfer for a class of risks defines Treaty Reinsurance, while individual, right-of-refusal underwriting defines Facultative Reinsurance.
These are the two primary methods by which primary insurers cede risk to reinsurers.
2
Evaluate the chain of risk dispersion beyond the initial reinsurance transaction.
Identify that when a reinsurer passes on risk to a third entity, this specific transaction is termed Retrocession.
Reinsurers must also protect their surplus, creating a multi-tiered risk transfer chain.
3
Determine the legal relationship between the original policyholder and the entities in the risk transfer chain.
Conclude that the Ceding Insurer retains sole privity of contract with the insured, maintaining the primary obligation to pay claims.
Reinsurance is a contract of indemnity strictly between insurers; it does not alter the original insurance contract.

Key Concept

Reinsurance Mechanisms and Privity of Contract
Estimated Time:2m 0s
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Topics

Reinsurance Concepts

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