ARM 402 Successfully Treating Risk Exam Test Bank
A with 200 Recent Exam Questions and Correct
Answers/ ARM 402 Exam 2025-2026 Test Bank
Allied Insurer has a $450,000 xs $150,000 per risk excess of loss reinsurance treaty
with Omega Reinsurer. An insured with a limit of $1,000,000 sustains the
following losses:
Loss 1: $125,000 Loss 2: $500,000 Loss 3: $850,000
How much will Omega Reinsurer pay for Loss 3?
A. $150,000
B. $212,500
C. $450,000
D. $650,000 - ANSWER-C: The first 150,000 will be retained, the next 450,000
will be reinsured, and the next 250,000 will also be retained. Omega Reinsurer will
pay $450,000 for Loss 3.
Which one of the following is correct with regard to an insurer's line and large-line
capacity?
A. Reinsurance is generally not used to increase insurers' large-line capacity.
B. An insurer's line is influenced by the maximum amount of insurance or limit of
liability allowed by insurance regulations.
C. Large-line capacity is an insurer's ability to reinsure a larger proportion of its
book of business.
D. The specific characteristics of a loss exposure do not influence an insurer's line.
- ANSWER-B
Which one of the following are shared by the primary insurer and the reinsurer in
pro rata reinsurance transactions?
pg. 1
,A. Commissions to producers
B. Premium taxes
C. Investment income from reserves
D. Amounts of insurance - ANSWER-D
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 is
A. Large-line capacity.
B. Surplus relief.
C. Portfolio management.
D. Novation. - ANSWER-A
Brookgreen Insurance has a 40% quota share treaty with Cypress Reinsurance.
Policy A has a limit of $50,000, a premium of $2,000, and a loss of $5,000. How
much of the premium will Cypress Reinsurance receive?
A. $200
B. $800
C. $1,000
D. $1,200 - ANSWER-B: Cypress Reinsurance will receive $2,000 × 40%, or
$800 of the premium.
Violet Insurance Company has a surplus share treaty with White Reinsurer and
retains a line of $50,000. The treaty contains five lines and provides for a
maximum cession of $250,000. Violet Insurance issues a policy insuring a building
for $150,000 for a premium of $1,900 with one loss of $60,000. What percentage
of insurance, premiums, and losses is ceded to White Reinsurer?
A. 33.33%
pg. 2
,B. 50%
C. 66.67%
D. 100% - ANSWER-C: 100,000 (2 lines ceded) ÷ 150,000 = 66.67%; The
percentage of insurance, premiums and losses ceded to White Reinsurer is 66.67%.
(Or, 2 ceded lines ÷ 3 insured lines = 66.67%.)
One of the functions of reinsurance is to increase large-line capacity. Which one of
the following best describes this function from the perspective of a primary
insurer?
A. To assume a loss exposure with potential financial consequences that are higher
than its financial condition would otherwise permit
B. To limit liability for a single loss that occurs over more than one policy period
C. To withdraw from a market segment in a geographic area
D. To reduce the financial consequences of a single catastrophic event that causes
multiple losses - ANSWER-A
Plastics Manufacturing Company (PMC) operates globally with property values
approaching $100 million. Liability exposures are considerable particularly for
products liability. Because of its size, PMC decides to form a captive insurer.
PMC's board of directors is unwilling to risk huge losses as the captive begins
operations. Which function of reinsurance would be most beneficial to PMC and
its captive insurer?
A. Increase large line capacity
B. Stabilize loss experience
C. Provide catastrophe protection
D. Provide underwriting guidance - ANSWER-B
Which one of the following statements regarding reinsurance is true?
pg. 3
, A. Reinsurance agreements typically require the primary company to retain part of
its original liability.
B. The ceding company is the insurer that agrees to indemnify another insurer in
case of loss.
C. Once risk is transferred to a reinsurer, the reinsurer cannot transfer the risk to
another reinsurer.
D. Reinsurance transfers the obligations that a primary insurer has to its insured to
the reinsurer. - ANSWER-A
Per risk excess of loss reinsurance covers
A. Workers compensation insurance and applies to the total of all losses occurring
from one risk.
B. Property insurance and applies separately to each loss occurring to each risk.
C. Liability insurance and applies to each loss occurring from each occurrence.
D. Property insurance and applies to the total of all losses occurring from one risk.
- ANSWER-B
A primary insurer uses reinsurance to
A. Indemnify it for some or all of the financial consequences of certain loss
exposures covered by the insurer's policies.
B. Shift responsibility for claim handling to another insurance entity.
C. Transfer all of its insurer's insurance risk to another insurance entity.
D. Confirm the adequacy of the premiums it charges to its insureds. - ANSWER-
A
Crimson Casualty Company began insurance operations last year. The company
experienced phenomenal success and wrote far more premiums than expected. A
representative from the state insurance department contacted Crimson Casualty and
warned the company that it was growing too fast and risking insolvency. The
pg. 4
A with 200 Recent Exam Questions and Correct
Answers/ ARM 402 Exam 2025-2026 Test Bank
Allied Insurer has a $450,000 xs $150,000 per risk excess of loss reinsurance treaty
with Omega Reinsurer. An insured with a limit of $1,000,000 sustains the
following losses:
Loss 1: $125,000 Loss 2: $500,000 Loss 3: $850,000
How much will Omega Reinsurer pay for Loss 3?
A. $150,000
B. $212,500
C. $450,000
D. $650,000 - ANSWER-C: The first 150,000 will be retained, the next 450,000
will be reinsured, and the next 250,000 will also be retained. Omega Reinsurer will
pay $450,000 for Loss 3.
Which one of the following is correct with regard to an insurer's line and large-line
capacity?
A. Reinsurance is generally not used to increase insurers' large-line capacity.
B. An insurer's line is influenced by the maximum amount of insurance or limit of
liability allowed by insurance regulations.
C. Large-line capacity is an insurer's ability to reinsure a larger proportion of its
book of business.
D. The specific characteristics of a loss exposure do not influence an insurer's line.
- ANSWER-B
Which one of the following are shared by the primary insurer and the reinsurer in
pro rata reinsurance transactions?
pg. 1
,A. Commissions to producers
B. Premium taxes
C. Investment income from reserves
D. Amounts of insurance - ANSWER-D
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 is
A. Large-line capacity.
B. Surplus relief.
C. Portfolio management.
D. Novation. - ANSWER-A
Brookgreen Insurance has a 40% quota share treaty with Cypress Reinsurance.
Policy A has a limit of $50,000, a premium of $2,000, and a loss of $5,000. How
much of the premium will Cypress Reinsurance receive?
A. $200
B. $800
C. $1,000
D. $1,200 - ANSWER-B: Cypress Reinsurance will receive $2,000 × 40%, or
$800 of the premium.
Violet Insurance Company has a surplus share treaty with White Reinsurer and
retains a line of $50,000. The treaty contains five lines and provides for a
maximum cession of $250,000. Violet Insurance issues a policy insuring a building
for $150,000 for a premium of $1,900 with one loss of $60,000. What percentage
of insurance, premiums, and losses is ceded to White Reinsurer?
A. 33.33%
pg. 2
,B. 50%
C. 66.67%
D. 100% - ANSWER-C: 100,000 (2 lines ceded) ÷ 150,000 = 66.67%; The
percentage of insurance, premiums and losses ceded to White Reinsurer is 66.67%.
(Or, 2 ceded lines ÷ 3 insured lines = 66.67%.)
One of the functions of reinsurance is to increase large-line capacity. Which one of
the following best describes this function from the perspective of a primary
insurer?
A. To assume a loss exposure with potential financial consequences that are higher
than its financial condition would otherwise permit
B. To limit liability for a single loss that occurs over more than one policy period
C. To withdraw from a market segment in a geographic area
D. To reduce the financial consequences of a single catastrophic event that causes
multiple losses - ANSWER-A
Plastics Manufacturing Company (PMC) operates globally with property values
approaching $100 million. Liability exposures are considerable particularly for
products liability. Because of its size, PMC decides to form a captive insurer.
PMC's board of directors is unwilling to risk huge losses as the captive begins
operations. Which function of reinsurance would be most beneficial to PMC and
its captive insurer?
A. Increase large line capacity
B. Stabilize loss experience
C. Provide catastrophe protection
D. Provide underwriting guidance - ANSWER-B
Which one of the following statements regarding reinsurance is true?
pg. 3
, A. Reinsurance agreements typically require the primary company to retain part of
its original liability.
B. The ceding company is the insurer that agrees to indemnify another insurer in
case of loss.
C. Once risk is transferred to a reinsurer, the reinsurer cannot transfer the risk to
another reinsurer.
D. Reinsurance transfers the obligations that a primary insurer has to its insured to
the reinsurer. - ANSWER-A
Per risk excess of loss reinsurance covers
A. Workers compensation insurance and applies to the total of all losses occurring
from one risk.
B. Property insurance and applies separately to each loss occurring to each risk.
C. Liability insurance and applies to each loss occurring from each occurrence.
D. Property insurance and applies to the total of all losses occurring from one risk.
- ANSWER-B
A primary insurer uses reinsurance to
A. Indemnify it for some or all of the financial consequences of certain loss
exposures covered by the insurer's policies.
B. Shift responsibility for claim handling to another insurance entity.
C. Transfer all of its insurer's insurance risk to another insurance entity.
D. Confirm the adequacy of the premiums it charges to its insureds. - ANSWER-
A
Crimson Casualty Company began insurance operations last year. The company
experienced phenomenal success and wrote far more premiums than expected. A
representative from the state insurance department contacted Crimson Casualty and
warned the company that it was growing too fast and risking insolvency. The
pg. 4
