Florida 2-20 General Lines Agent (Property, Casualty, Commercial Lines and Florida Law)General InsuranceHard
A large commercial property insurer operating in Florida decides to transfer a portion of its catastrophic hurricane risk to several other insurers. They do this by entering into agreements where the other insurers agree to accept a share of the potential losses in exchange for a premium. This arrangement is specifically known as which of the following?
- ASelf-Insurance
- BTreaty Reinsurance
- CRisk Retention
- DFacultative Reinsurance
Show answer & explanationAnswer & explanation
Correct answer: B. Treaty Reinsurance
Treaty reinsurance involves an agreement where the reinsurer agrees to accept an entire class or portfolio of risks from the ceding insurer. This is a pre-negotiated, automatic transfer of a specified portion of risk, often for catastrophic events, without individual assessment of each risk.
Why the other options are wrong
- A. Self-insurance is a form of risk retention where a company sets aside funds to cover its own losses.
- C. Risk retention is keeping the risk rather than transferring it.
- D. Facultative reinsurance is on a per-risk basis, where the reinsurer has the option to accept or reject each individual risk.
Treaty Reinsurance
A reinsurance agreement under which the primary insurer agrees to cede and the reinsurer agrees to accept all risks of a certain class or type.
- Automatic transfer of risk for a defined portfolio.
- Often used for high-volume or catastrophic risks.
- Provides stability and capacity for the primary insurer.
Memory trick: Treaty reinsurance is like a 'treaty' for a whole group of risks, not just one.