Free CAIB 3 Practice Questions: Reinsurance

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These are original Finance Prep practice questions aligned to this topic area. They are not official CAIB exam questions, copied live-exam content, or exam dumps. Use them for self-assessment, scope review, and deciding what to drill next.

Question 1

Topic: Reinsurance

A broker is placing a large Canadian logistics account with values that exceed one insurer’s normal capacity. The underwriter says the insurer may be able to participate, but only after arranging reinsurance specifically for this account. The broker tells the client that the insurer is seeking support for this individual risk and that the broker can help provide underwriting information but cannot control whether the reinsurer agrees.

Which reinsurance concept best matches the underwriter’s comment?

• A. Facultative reinsurance
• B. Proportional reinsurance
• C. Treaty reinsurance
• D. Excess-of-loss reinsurance

Best answer: A

What this tests: Reinsurance

Explanation: Facultative reinsurance applies when an insurer seeks reinsurance for a particular risk or account rather than relying only on an automatic portfolio arrangement. In client communication, the broker should keep the explanation client-safe: the insured buys insurance from the insurer, and the insurer may use reinsurance to manage its own capacity or accumulation. The broker can help gather accurate schedules, valuations, operations details, loss history, and risk-control information, but should not imply control over the reinsurer’s acceptance, terms, price, or timing.

• Treaty reinsurance is usually an automatic arrangement covering a class or portfolio of risks, not a one-off decision for a single account.
• Proportional reinsurance describes sharing premiums and losses in an agreed proportion; it does not by itself indicate case-by-case placement.
• Excess-of-loss reinsurance responds above a specified loss level; it describes the structure of loss sharing, not the fact that support is being sought for one specific account.

Facultative reinsurance is arranged case by case for a specific risk, so the broker’s role is to support the information flow without promising the reinsurer’s decision.

Question 2

Topic: Reinsurance

A broker is marketing a renewal for a food processor that needs a $50 million property and business interruption limit. The lead insurer says its available capacity is limited because the account has a large refrigeration exposure, one prior ammonia leak loss, and high values at a single location. The underwriter asks for updated values, five-year loss history, the latest risk engineering report, and details of refrigeration maintenance controls before confirming terms. What is the broker’s best response to the client?

• A. Advise that the request is unnecessary because the expiring insurer already knows the account and must offer the same capacity at renewal.
• B. Submit the renewal without the requested reports and ask the insurer to bind subject to receiving the documents after the policy starts.
• C. Explain that the insurer may need the information to assess accumulation, loss control, and possible reinsurance support before committing capacity.
• D. Tell the client to reduce the declared values so the insurer can fit the account within its available capacity.

Best answer: C

What this tests: Reinsurance

Explanation: When an insurer has limited capacity for a large or complex commercial account, it may need more than basic renewal data before offering terms. Updated values help measure the amount at risk and possible accumulation. Loss history shows frequency, severity, and trends. Risk engineering reports and control details help the insurer judge whether the exposure is being managed. In reinsurance-sensitive placements, that same information may support internal capacity approval or discussions with reinsurers. The broker should help the client understand that the request is not just paperwork; it can affect market access, limits, pricing, conditions, and timing.

• Prior familiarity with the account does not oblige an insurer to renew the same capacity, especially where values, losses, or risk appetite have changed.
• Understating values creates serious coverage and client-service problems; it does not properly solve a capacity issue.
• Binding first and supplying key underwriting evidence later may be unrealistic where capacity approval depends on that evidence.

Capacity-limited placements often require fuller underwriting evidence so insurers and any reinsurers can evaluate the size, quality, and controllability of the risk.

Question 3

Topic: Reinsurance

A manufacturer asks for a large property and business interruption limit on a complex risk. The insurer says it cannot quote until it completes a capacity review and confirms reinsurance support. Which broker response best fits this situation?

• A. Assure the client that reinsurance approval means the insurer will quote the requested limits on the same terms as the expiring policy.
• B. Contact the reinsurer directly to negotiate coverage terms for the client and bypass the insurer’s capacity process.
• C. Advise the client that reinsurance is a separate policy the client must buy before the insurer can issue its own quote.
• D. Tell the client the insurer is checking how much risk it can retain or share, gather any requested underwriting information promptly, and avoid promising a quote date or terms.

Best answer: D

What this tests: Reinsurance

Explanation: Reinsurance is purchased by the insurer to manage its own risk, capacity, catastrophe exposure, or portfolio volatility. The insured does not normally buy reinsurance, and the broker does not negotiate directly with the reinsurer on the client’s behalf. When an insurer needs reinsurance support or a capacity review before quoting, the practical broker role is to explain the reason for the delay in plain language, obtain complete underwriting details, respond quickly to information requests, document communications, and avoid guaranteeing terms, limits, pricing, or timing. The broker may also discuss market strategy with the client if timing or capacity becomes a concern.

• Treating reinsurance as a separate client policy confuses insurance with insurer risk transfer.
• Bypassing the insurer to negotiate with the reinsurer is outside the usual broker-client placement relationship.
• Assuming approval guarantees the same limits or terms overstates what capacity review can confirm.

Reinsurance support and capacity review are insurer risk-sharing matters, so the broker should manage client expectations and support the underwriting process with complete information.

Question 4

Topic: Reinsurance

A commercial insurer writes many small and mid-sized manufacturing accounts across Canada. To stabilize results and provide automatic capacity for this whole class of business, the insurer enters into an annual arrangement under which a reinsurer accepts a defined share of qualifying accounts as they are written. Which reinsurance concept best matches this arrangement?

• A. Claims-made management liability coverage
• B. Single-project surety bond
• C. Facultative reinsurance
• D. Treaty reinsurance

Best answer: D

What this tests: Reinsurance

Explanation: Treaty reinsurance is arranged in advance for a portfolio, class, or book of business. Once the insurer writes risks that meet the treaty terms, the reinsurance applies automatically according to the agreement. Facultative reinsurance is different: it is considered risk by risk, often for an unusual, large, hazardous, or hard-to-place account that needs separate reinsurer review. In broker-facing terms, treaty reinsurance supports an insurer’s overall capacity and stability for a category of business, while facultative reinsurance may affect the timing and information requirements for a specific client placement.

• Facultative reinsurance is negotiated for an individual risk, not an automatic annual arrangement for a whole class of accounts.
• A single-project surety bond guarantees a principal’s obligation to an obligee; it is not insurer-to-insurer risk sharing.
• Claims-made management liability coverage relates to D&O-style claims reporting, not reinsurance capacity for a portfolio.

Treaty reinsurance applies to a defined portfolio or class of business rather than being negotiated separately for each individual risk.

Question 5

Topic: Reinsurance

A broker is marketing coverage for a Canadian food manufacturer that has recently expanded into a larger plant with higher stock values and a new cold-storage operation. The lead insurer says it is interested but needs reinsurance support and a capacity review before it can quote the requested limits. The client wants a firm premium indication by the end of the week. What is the broker’s best response?

• A. Advise the client that the reinsurer will be directly responsible for paying any future claim under the policy.
• B. Explain the capacity review to the client, gather any additional underwriting information requested, and set realistic timing without representing that terms are guaranteed.
• C. Ask the client to reduce the declared values so the insurer can quote without seeking reinsurance support.
• D. Tell the insurer to issue a binder now and complete the reinsurance review after coverage is in force.

Best answer: B

What this tests: Reinsurance

Explanation: Reinsurance is a risk-sharing arrangement used by insurers to manage capacity, large limits, accumulation, catastrophe exposure, or volatility. It does not replace the client’s contract with the insurer, and it does not create a direct policy relationship between the insured and the reinsurer. When reinsurance support or a capacity review is needed before quoting, the broker’s role is to communicate the reason for the delay, obtain complete underwriting information, document the status, and avoid guaranteeing premium, limits, or coverage until the insurer confirms its terms. For a larger food manufacturer with higher stock values and cold-storage exposure, the insurer may reasonably need more time and information before committing capacity.

• Treating the reinsurer as directly responsible to the client misunderstands the insured-insurer relationship.
• Reducing declared values to avoid capacity review would create inaccurate underwriting information and could harm the client.
• Binding before the insurer has confirmed capacity exceeds proper authority and may leave the client with unsupported expectations.

The broker should manage the client’s expectations, support the insurer’s capacity process, and avoid promising terms before the insurer and its reinsurers have confirmed capacity.

Question 6

Topic: Reinsurance

A regional insurer writes a new portfolio of small commercial property policies. Under its reinsurance contract, the reinsurer automatically accepts 40% of every policy in that portfolio, receives 40% of the related premium, and pays 40% of covered losses. Which reinsurance arrangement is being described?

• A. Quota share reinsurance
• B. Excess of loss reinsurance
• C. Surplus reinsurance
• D. Facultative reinsurance

Best answer: A

What this tests: Reinsurance

Explanation: Quota share reinsurance is a proportional form of reinsurance. The insurer cedes a fixed percentage of each covered risk to the reinsurer, and the reinsurer takes that same percentage of premium and loss. The clue is the automatic 40% sharing across every policy in the portfolio. This differs from facultative reinsurance, which is negotiated risk by risk, and from excess of loss reinsurance, which responds only after losses exceed a stated retention or attachment point. For a broker, the key practical point is that reinsurance supports insurer capacity and portfolio management; the policyholder still buys insurance from the insurer, not from the reinsurer.

• Facultative reinsurance is arranged for an individual risk, not automatically for every policy in a defined portfolio.
• Surplus reinsurance is proportional, but it applies above the insurer’s retained line rather than by the same fixed percentage on every policy.
• Excess of loss reinsurance is non-proportional and responds above a retention, rather than sharing every premium and loss by percentage.

Quota share is a proportional arrangement where the insurer and reinsurer share premiums and losses by a fixed percentage across the covered portfolio.

Question 7

Topic: Reinsurance

A manufacturer asks its broker to place a very high property and business interruption limit for a single, hard-to-protect location. The underwriter is interested but says the insurer may need more engineering details and additional time before confirming capacity because the account could exceed what the insurer wants to retain on its own. Which CAIB 3 concept best matches this placement issue?

• A. The insured should purchase reinsurance directly to replace the commercial policy
• B. A surety bond should be issued because the insurer is guaranteeing contract performance
• C. The insurer may need facultative reinsurance support for the large or difficult account
• D. A coinsurance clause will automatically provide the additional limit required

Best answer: C

What this tests: Reinsurance

Explanation: A broker does not place reinsurance for the insured in the normal commercial account relationship, but reinsurance context can matter when an insurer is considering a large, complex, high-limit, or difficult risk. The insurer may need to manage how much of the risk it keeps, confirm treaty capacity, or seek facultative reinsurance for that particular account. This can lead to more underwriting questions, requests for engineering reports or values, and longer placement timelines. The broker’s role is to manage client expectations, gather complete information, and avoid promising capacity before insurer confirmation.

• Direct purchase of reinsurance is not the usual client solution; the insured buys insurance from the insurer, and the insurer may buy reinsurance.
• Surety responds to contractual or regulatory obligations, not ordinary property insurance capacity.
• Coinsurance affects valuation and loss settlement requirements; it does not create extra insurer capacity or limits.

Facultative reinsurance is arranged for a specific risk and can affect capacity, timing, and information requests on large or complex placements.

Question 8

Topic: Reinsurance

A Canadian manufacturer asks its broker why the insurer is taking extra time to confirm terms for a large property and business interruption limit. The underwriter says the account has a high concentration of values at one location and may require reinsurance support before the insurer can commit capacity. Which explanation best describes why the insurer may use reinsurance in this situation?

• A. To replace the client’s commercial insurance policy with a direct contract between the client and the reinsurer
• B. To avoid the need for underwriting information because the reinsurer becomes responsible for assessing the account
• C. To share part of the insurer’s exposure with another insurer so it can manage capacity, accumulation, and volatility on a large commercial risk
• D. To guarantee that the client’s loss will be paid even if the policy excludes the cause of loss

Best answer: C

What this tests: Reinsurance

Explanation: Reinsurance is insurance purchased by an insurer to manage its own exposure. For a complex commercial account, a single insurer may be concerned about the size of the limit, concentration of values, catastrophe accumulation, business interruption exposure, or volatility in its portfolio. By using reinsurance, the insurer can share part of that exposure and may be able to offer capacity it would not retain entirely on its own. The policyholder still deals with its insurer under the commercial insurance policy; reinsurance is usually a separate arrangement behind the insurer’s placement decision. For brokers, the practical impact is often timing, additional underwriting questions, or conditional capacity rather than a separate client-facing policy.

• A direct client-reinsurer contract misstates the relationship; the insured buys insurance from the insurer, while the insurer may buy reinsurance.
• Reinsurance does not override exclusions or guarantee payment outside the policy terms.
• Reinsurance does not eliminate underwriting; large or complex risks often require more detailed information before capacity is confirmed.

Reinsurance lets the insurer transfer part of its risk to a reinsurer, helping it support large or complex accounts while managing its own risk position.

Question 9

Topic: Reinsurance

A broker is placing coverage for a food processor with $120 million in property and business interruption values at one plant. The plant uses ammonia refrigeration and is located in an area where the insurer already has several large industrial risks exposed to the same flood event. The underwriter says the insurer’s normal net capacity is not enough and requests detailed construction, protection, flood, and business interruption information so it can seek account-specific support before confirming terms.

Which concept best explains the underwriter’s request?

• A. Facultative reinsurance to add capacity and manage accumulation on this specific risk
• B. A quota share treaty to automatically cede a fixed percentage of every policy in the insurer’s portfolio
• C. A surety bond to guarantee the client’s financial performance after a loss
• D. A business interruption coinsurance review to confirm the insured’s reporting basis

Best answer: A

What this tests: Reinsurance

Explanation: Reinsurance is purchased by insurers, not by the commercial insured, to help manage the insurer’s own risk. In this scenario, the issue is not simply whether the client needs property or business interruption insurance. The insurer is concerned about a very large limit, high-hazard features, and several nearby risks that could be affected by the same catastrophe. When an insurer needs account-specific support for a risk that exceeds its normal capacity or creates an accumulation problem, facultative reinsurance is the fitting concept. The broker’s role is to provide complete underwriting information and explain that reinsurance review may affect timing, available limits, and terms, without promising the reinsurer’s approval.

• A quota share treaty may support an insurer’s portfolio, but the facts point to account-specific support beyond normal capacity.
• A coinsurance review may matter for business interruption values, but it does not address the insurer’s catastrophe accumulation or net capacity problem.
• A surety bond guarantees performance of an obligation; it is not insurer risk sharing for a large property account.

The underwriter is seeking separate reinsurance support for one large, high-hazard account that creates capacity and accumulation concerns.

Question 10

Topic: Reinsurance

A broker is placing a large Canadian manufacturer with a requested property limit that is higher than the insurer usually writes on a single location. The insurer says its treaty capacity is tight because it already insures several nearby risks, and it may need facultative reinsurance before confirming terms. The client asks the broker to “get the reinsurer to approve it” and wants to know whether the client will have a separate contract with the reinsurer. Which explanation should the broker give?

• A. The client should buy treaty reinsurance directly because treaty arrangements are coverage contracts between commercial insureds and reinsurers.
• B. The broker can bind excess-of-loss reinsurance for the insurer if the client accepts a higher premium and larger deductible.
• C. The insurer should use proportional reinsurance because it only responds after the insurer has paid a stated loss amount.
• D. The insurer may seek facultative reinsurance for this individual risk, while the broker supports the process with complete underwriting information and avoids promising reinsurer approval.

Best answer: D

What this tests: Reinsurance

Explanation: Reinsurance is risk sharing between insurers and reinsurers, not a separate insurance contract purchased by the commercial client. Treaty reinsurance is usually arranged in advance for a portfolio or class of business. Facultative reinsurance is considered risk by risk and may be used when a large or unusual account strains capacity or creates accumulation concerns. Proportional reinsurance shares premiums and losses by an agreed percentage, while excess-of-loss reinsurance responds above a stated retention or layer. For client communication, the broker can explain why the insurer needs more information or time, help submit complete underwriting details, and document the status. The broker should not suggest that the client controls the reinsurer, that approval is guaranteed, or that the broker can bind reinsurance on the insurer’s behalf.

• Treating treaty reinsurance as a client-purchased contract misstates the insured’s relationship with the insurer.
• Describing proportional reinsurance as responding only above a stated amount confuses it with excess-of-loss reinsurance.
• Saying the broker can bind excess-of-loss reinsurance overstates broker authority and insurer reinsurance control.

Facultative reinsurance is arranged risk by risk by the insurer, and the broker should communicate timing and information needs without overstating control.

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