AIAF 114 2.0 EXAM QUESTIONS AND
ANSWERS
Ultimate loss - ANSWER-The final paid amount for all losses in an accident year.
Loss development - ANSWER-The increase or decrease of incurred losses over time.
Case reserve - ANSWER-A loss reserve assigned to an individual claim.
Bulk reserves - ANSWER-Reserves established for the settlement of an entire group of
claims.
Judgment method - ANSWER-A method to establish a case loss reserve based largely
on experience with similar claims.
Average method - ANSWER-A method to establish a case reserve by using an average
amount for specific categories of claims.
Tabular method - ANSWER-A case reserving method that establishes an average
amount for all claims that have similar characteristics in terms of the claimant's age,
health, and marital status.
Ultimate loss development factor - ANSWER-A factor that is applied to the most recent
estimate of incurred losses for a specific accident year to estimate the ultimate incurred
loss for that year.
Reinsurance - ANSWER-The transfer of insurance risk from one insurer to another
through a contractual agreement under which one insurer (the reinsurer) agrees, in
return for a reinsurance premium, to indemnify another insurer (the primary insurer) for
some or all of the financial consequences of certain loss exposures covered by the
primary's insurance policies.
Primary insurer - ANSWER-In reinsurance, the insurer that transfers or cedes all or part
of the insurance risk it has assumed to another insurer in a contractual arrangement.
Reinsurer - ANSWER-The insurer that assumes some or all of the potential costs of
insured loss exposures of the primary insurer in a reinsurance contractual agreement.
Reinsurance agreement - ANSWER-Contract between the primary insurer and reinsurer
that stipulates the form of reinsurance and the type of accounts to be reinsured.
Insurance risk - ANSWER-Uncertainty about the adequacy of insurance premiums to
pay losses.
, Retention - ANSWER-The amount retained by the primary insurer in the reinsurance
transaction.
Reinsurance premium - ANSWER-The consideration paid by the primary insurer to the
reinsurer for assuming some or all of the primary insurer's insurance risk.
Ceding commission - ANSWER-An amount paid by the reinsurer to the primary insurer
to cover part or all of the primary insurer's policy acquisition expenses.
Retrocession - ANSWER-A reinsurance agreement whereby one reinsurer (the
retrocedent) transfers all or part of the reinsurance risk it has assumed or will assume to
another reinsurer (the retrocessionaire).
Retrocedent - ANSWER-The reinsurer that transfers or cedes all or part of the
insurance risk it has assumed to another reinsurer.
Retrocessionaire - ANSWER-The reinsurer that assumes all or part of the reinsurance
risk accepted by another reinsurer.
Large-line capacity - ANSWER-An insurer's ability to provide larger amounts of
insurance for property loss exposures, or higher limits of liability for liability loss
exposures, than it is otherwise willing to provide.
Line - ANSWER-The maximum amount of insurance or limit of liability that an insurer
will accept on a single loss exposure.
Surplus relief - ANSWER-A replenishment of policyholders' surplus provided by the
ceding commission paid to the primary insurer by the reinsurer.
Policyholders' surplus - ANSWER-Under statutory accounting principles (SAP), an
insurer's total admitted assets minus its total liabilities.
Portfolio reinsurance - ANSWER-Reinsurance that transfers to the reinsurer liability for
an entire type of insurance, territory, or book of business after the primary insurer has
issued the policies.
Novation - ANSWER-An agreement under which one insurer or reinsurer is substituted
for another.
Treaty reinsurance - ANSWER-A reinsurance agreement that covers an entire class or
portfolio of loss exposures and provides that the primary insurer's individual loss
exposures that fall within the treaty are automatically reinsured.
Facultative reinsurance - ANSWER-Reinsurance of individual loss exposures in which
the primary insurer chooses which loss exposures to submit to the reinsurer, and the
reinsurer can accept or reject any loss exposures submitted.
ANSWERS
Ultimate loss - ANSWER-The final paid amount for all losses in an accident year.
Loss development - ANSWER-The increase or decrease of incurred losses over time.
Case reserve - ANSWER-A loss reserve assigned to an individual claim.
Bulk reserves - ANSWER-Reserves established for the settlement of an entire group of
claims.
Judgment method - ANSWER-A method to establish a case loss reserve based largely
on experience with similar claims.
Average method - ANSWER-A method to establish a case reserve by using an average
amount for specific categories of claims.
Tabular method - ANSWER-A case reserving method that establishes an average
amount for all claims that have similar characteristics in terms of the claimant's age,
health, and marital status.
Ultimate loss development factor - ANSWER-A factor that is applied to the most recent
estimate of incurred losses for a specific accident year to estimate the ultimate incurred
loss for that year.
Reinsurance - ANSWER-The transfer of insurance risk from one insurer to another
through a contractual agreement under which one insurer (the reinsurer) agrees, in
return for a reinsurance premium, to indemnify another insurer (the primary insurer) for
some or all of the financial consequences of certain loss exposures covered by the
primary's insurance policies.
Primary insurer - ANSWER-In reinsurance, the insurer that transfers or cedes all or part
of the insurance risk it has assumed to another insurer in a contractual arrangement.
Reinsurer - ANSWER-The insurer that assumes some or all of the potential costs of
insured loss exposures of the primary insurer in a reinsurance contractual agreement.
Reinsurance agreement - ANSWER-Contract between the primary insurer and reinsurer
that stipulates the form of reinsurance and the type of accounts to be reinsured.
Insurance risk - ANSWER-Uncertainty about the adequacy of insurance premiums to
pay losses.
, Retention - ANSWER-The amount retained by the primary insurer in the reinsurance
transaction.
Reinsurance premium - ANSWER-The consideration paid by the primary insurer to the
reinsurer for assuming some or all of the primary insurer's insurance risk.
Ceding commission - ANSWER-An amount paid by the reinsurer to the primary insurer
to cover part or all of the primary insurer's policy acquisition expenses.
Retrocession - ANSWER-A reinsurance agreement whereby one reinsurer (the
retrocedent) transfers all or part of the reinsurance risk it has assumed or will assume to
another reinsurer (the retrocessionaire).
Retrocedent - ANSWER-The reinsurer that transfers or cedes all or part of the
insurance risk it has assumed to another reinsurer.
Retrocessionaire - ANSWER-The reinsurer that assumes all or part of the reinsurance
risk accepted by another reinsurer.
Large-line capacity - ANSWER-An insurer's ability to provide larger amounts of
insurance for property loss exposures, or higher limits of liability for liability loss
exposures, than it is otherwise willing to provide.
Line - ANSWER-The maximum amount of insurance or limit of liability that an insurer
will accept on a single loss exposure.
Surplus relief - ANSWER-A replenishment of policyholders' surplus provided by the
ceding commission paid to the primary insurer by the reinsurer.
Policyholders' surplus - ANSWER-Under statutory accounting principles (SAP), an
insurer's total admitted assets minus its total liabilities.
Portfolio reinsurance - ANSWER-Reinsurance that transfers to the reinsurer liability for
an entire type of insurance, territory, or book of business after the primary insurer has
issued the policies.
Novation - ANSWER-An agreement under which one insurer or reinsurer is substituted
for another.
Treaty reinsurance - ANSWER-A reinsurance agreement that covers an entire class or
portfolio of loss exposures and provides that the primary insurer's individual loss
exposures that fall within the treaty are automatically reinsured.
Facultative reinsurance - ANSWER-Reinsurance of individual loss exposures in which
the primary insurer chooses which loss exposures to submit to the reinsurer, and the
reinsurer can accept or reject any loss exposures submitted.
