Casualty Actuarial Society (CAS) Practice Exam

How does a working cover excess of loss agreement benefit a primary insurer?

1. It allows for higher risk retention

2. It sets an unreasonably high attachment point

3. It spreads losses over multiple years

4. It eliminates the need for additional cessions

The correct answer is: It spreads losses over multiple years

A working cover excess of loss agreement benefits a primary insurer primarily by spreading losses over multiple years. This means that when the insurer encounters large losses that exceed the retention limits of their primary coverage, the excess of loss agreement helps to absorb these costs over time, rather than all at once. By doing so, the insurer can manage its cash flow more effectively and mitigate the financial impact of severe loss events. In addition, this type of agreement enhances the insurer's ability to underwrite new policies without the immediate pressure of potential catastrophic losses affecting their overall financial stability. By spreading out the loss burden, it allows the insurer to maintain solvency and provide consistent coverage to policyholders. This approach underlines the importance of managing risk dynamically, ensuring that the insurer can address unexpectedly significant claims while still operating sustainably.