Discuss Insurance Institute C11 Exam Topic 3 Question 3

[Insurance Companies / Reinsurance]

An insurer writes a $60,000,000 risk for a premium of $30,000. Using pro rata reinsurance, it transfers 25% of the risk to the reinsurer. The risk then suffers a $100,000 loss. How much does the reinsurer contribute to this loss?

A$25,000

B$60,000

C$75,000

D$100,000

Suggested Answer: A

In pro rata (proportional) reinsurance, the reinsurer assumes a fixed percentage of both the risk and the premium, and in return pays the same percentage of any losses. Here, the insurer cedes 25% of the risk to the reinsurer. Therefore, the reinsurer must contribute 25% of any loss that occurs on that policy.

The loss amount is $100,000.

Reinsurer's share = 25% $100,000 = $25,000.

The insurer retains the remaining 75%, or $75,000. Proportional reinsurance helps insurers manage exposure by sharing both costs and losses. Options B, C, and D do not correctly reflect proportional-sharing principles. The reinsurer does not pay the full loss; it only pays its agreed percentage.

Thus, the correct answer is A: $25,000.

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13 comments · newest first

Bulah 4 days ago

Exactly! The reinsurer covers 25% of the loss. Good calculation!

Evelynn 9 days ago

That makes it $25,000, right? I feel confident about that.

Fallon 14 days ago

Yeah, it's 25% of the loss. So, $100,000 loss times 25%.

Ruby 20 days ago

This question is tricky. I think the reinsurer's share is key.

Shawna 25 days ago

I don't know, that loss is pretty big for just 25%.

Clarinda 30 days ago

Yup, $25,000 sounds right to me.

Ivette 1 month ago

Wait, is it really only $25,000? Seems low.

Leota 1 month ago

Definitely going with option A!

Abel 2 months ago

The reinsurer takes on 25% of the risk.

Devora 2 months ago

I feel like I should double-check the loss amount and the percentage. I hope it's just a simple multiplication, but I can't recall the exact steps.

Mertie 2 months ago

Wait, if the loss is $100,000 and the reinsurer takes 25%, does that mean they pay $25,000? But what if I miscalculated the percentage?

Amalia 2 months ago

I remember a similar question where we had to find the reinsurer's share of a loss. I think it was just a straightforward percentage calculation.

Jame 2 months ago

I think the reinsurer would cover 25% of the loss, but I'm not sure how to calculate that exactly.

Insurance Institute C11 Exam - Topic 3 Question 3 Discussion