California Life-Only & Accident and Health AgentGeneral InsuranceHard
A large corporation self-insures its employee health benefits. However, to protect against catastrophic claims that exceed a certain dollar amount per employee, they purchase a policy from a traditional insurer. This arrangement is known as:
- AFacultative Reinsurance
- BCaptive Insurance
- CTreaty Reinsurance
- DExcess of Loss Reinsurance
Show answer & explanationAnswer & explanation
Correct answer: D. Excess of Loss Reinsurance
Excess of loss reinsurance (a form of reinsurance, though here applied to self-insurance) protects the self-insurer (or primary insurer) from claims exceeding a specific amount. In this case, the corporation self-insures up to a certain limit, then the 'reinsurer' (the traditional insurer) covers amounts beyond that, which is characteristic of excess of loss coverage.
Why the other options are wrong
- A. Facultative reinsurance is negotiated separately for each loss exposure.
- B. Captive insurance is an insurer established by a parent company to insure its own risks.
- C. Treaty reinsurance covers an entire class or portfolio of business automatically.
Excess of Loss Reinsurance
Excess of loss reinsurance is a type of reinsurance where the reinsurer pays only if the loss exceeds a predetermined amount, protecting the primary insurer (or self-insurer) from large, infrequent losses.
- Reinsurer pays only above a specified 'retention limit'.
- Protects against catastrophic losses.
- Commonly used to manage volatility.
Memory trick: Reinsurance is Facultative or Treaty, and can be Pro Rata or Excess of Loss.