Casualty Actuarial Society (CAS) Practice Exam

What type of reinsurance treaty is indicated when an insurer retains 45 percent of policy premiums?

1. A 45 percent quota share treaty

2. A 55 percent quota share treaty

3. A surplus share treaty

4. An excess of loss treaty

The correct answer is: A 55 percent quota share treaty

The correct designation for the type of reinsurance treaty is a 45 percent quota share treaty. In a quota share treaty, the reinsurer agrees to accept a fixed percentage of all premiums and claims for a specific class or segment of business. In this case, if the insurer retains 45 percent of policy premiums, it indicates that 55 percent is ceded to the reinsurer. The key element of a quota share treaty is the proportional sharing of the premiums and losses between the insurer and the reinsurer. With the insurer retaining 45 percent, the reinsurer is responsible for the remaining 55 percent. Therefore, the insurer’s retention percentage directly defines the proportion of the treaty. In contrast, a surplus share treaty involves the ceding of risks above a certain retention limit, which does not apply here, as the retention percentage is specified. An excess of loss treaty is also different in nature; it provides coverage for losses above a certain level but does not involve a proportional sharing of premiums. Thus, the structure described aligns with a 55 percent quota share treaty, as it signifies the amount ceded to the reinsurer, with the insurer retaining 45 percent of the premiums.