A GUIDE TO REINSURANCE LAW Chapter 12 ANSWERS TO TEST YOURUNDERSTANDING QUESTIONS

1st Edition, 2007

Chapter 12

ANSWERS TO TEST YOURUNDERSTANDING QUESTIONS

Chapter 1The Nature of Reinsurance
1. Is the following statement true or false? Insurance and reinsurance are fundamentally different in legal terms.
Answer: False. In Common Law countries around the world, reinsurance is generally seen as legally akin to insurance.
2. Which of the following most accurately describes Facultative Reinsurance?
Answer: (c) Facultative reinsurance is reinsurance that the reinsured can offer to reinsurers and reinsurers can accept.
3. Which of the following could be described as Proportional RI and which Non-Proportional?
Answer:
(a) Quota ShareProportional
(b) Facultative ObligatoryProportional
(c) Stop LossNon-Proportional
(d) FacultativeCould be both.
4. Which of the following is likely to be described as Obligatory Reinsurance?
Answer: (a) Surplus. Reinsured (normally) must cede, Reinsurer must accept.
Whereas (b) Risk X/LGranting cover for a period for a price; (c) Stop LossGranting cover for a period for a price; (d) Facultative
Obligatory Reinsured does not have to cede, Reinsurer must accept.
5. Under Proportional Reinsurance which reflects the correct method of calculating a loss?
Answer: (d) Allocation of losses between reinsured and reinsurers is based on the allocation of the original riskthe percentage of
any loss (and any premium) is calculated based on the allocation of the original risk. SI 100,000, Retain 40,000, Cede
60,000Allocation 40%60%.
Whereas (c) Allocation of losses between reinsured and reinsurers depends if the loss is large or smallmore likely to reflect
Non-Proportional.
6. Which of the following explains the correct workings of a 2nd Surplus Treaty?
Answer: (d) Reinsurers will receive a share of risks that are larger than the retention and cession to 1st Surplus. If the programme is
based on Surplus Treaties, all smaller risks which fall within the retention will be retained 100%if the risk is larger than the
retention the surplus will be ceded to the 1st Surplus until that is full, only then will a share of the risk (premium and any losses) be
ceded to the 2nd Surplus.
7. Reinstatementswhich of the following are true?
Answer: None of them.
(a) Reinstatements are common in all types of reinsuranceNo. Normally only applies to Excess of Loss Treaty
(b) The term 1 reinstatement at 100% means:

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(i) The reinsured can put in 1 claim in the yearNo. The reinsured can reinstate up to 100% of the overall limit given (1 x
the limit)
(ii) The Reinstatement Premium will be 100% of what the reinsured paid for 12 months coverNo. 100% means that the
date of loss will NOT be taken into account when calculating the premium due.
8. Which is the true explanation of the extended expiration clause?
Answer: (d) If a peril covered has started causing damage at the end of the contract period this clause confirms that the whole loss
falls on the year the loss started insubject to no loss from the same happening being claimed of any subsequent year as well.
9. Based on market terminology which of the following best reflects the term Stop Loss?
Answer: (c) A reinsurance protecting a portfolio of business that will pay if a loss in the year for all risks covered a loss ratio of
X%Stop Loss is normally used to describe this form of reinsurance where the Cover and Deductible are expressed as a % of
retained premiumits more accurate name perhapsExcess of Loss Ratio Cover.

Robert Merkin

A GUIDE TO REINSURANCE LAW Chapter 12 ANSWERS TO TEST YOURUNDERSTANDING QUESTIONS

1st Edition, 2007

Whereas (a) A Facultative Reinsurance that will pay if an individual loss is larger than $?This term normally would apply over a
portfolio of business for a period of time.
10. Do the words Terms; As original, and to follow settlements in all respects mean that the following terms are likely to be
automatically incorporated into a Reinsurance?
Answer:
(a) Original PremiumYes
(b) Original deductionsYes
(c) ArbitrationNo
(d) Local LawNo
(e) Local JurisdictionNo.
A wide range of court cases continue to insist that if the parties intend itemssuch as (c), (d) and (e) to be reflected in the Reinsurance,
this should be madespecifically clear in the Reinsurance.

Chapter 2Formation of Reinsurance Agreements

1. Which of the following elements determine whether a reinsurance company is carrying on business in the United Kingdom?
Answer:
(a) the place where the agreement is negotiated and made
(b) the place where the underwriting decision is taken
(d) the place where losses are paid.
2. Which of the following statements are true in relation to the authorisation requirement?
Answer:
(a) a reinsurer must be authorised to carry on insurance business in the U.K.
(b) a reinsurer must be authorised to carry on reinsurance business in the U.K.
(d) U.K. authorisation confers the right of direct sales elsewhere in the EEA.
3. Which of the following statements are correct?
Answer:
(a) an unauthorised insurer is always liable to its policy holders
(d) an unauthorised insurer who has to pay its policy holders is able to recover from its reinsurers in all circumstances.
4. Which of the following statements are correct?
Answer: (b) a subscription to a reinsurance slip is a contract of reinsurance.
5. Which of the following statements are correct?
Answer: (d) the broker can vary the subscribed percentages to an oversubscribed slip.
6. Which of the following statements are correct?
Answer:
(b) a contract of reinsurance made in advance of a contract of insurance is a unilateral contract

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(d) a broker can face personal liability to reinsurers when placing reinsurance in advance of insurance.
7. Which of the following statements are correct?
Answer:
(b) policy wording is subject to the wording in the slip
(c) the following market can always avoid a subscription where false statements have been made to the leading underwriter
(d) the following market can always avoid a subscription for material non-disclosure to the leading underwriter.
8. Which of the following statements are correct?
Answer:

Robert Merkin

A GUIDE TO REINSURANCE LAW Chapter 12 ANSWERS TO TEST YOURUNDERSTANDING QUESTIONS

1st Edition, 2007

(a) a line slip constitutes an agency agreement between underwriters

(d) a leading underwriter clause is irrevocable.
9. In the Sphere Drake case, which of the following head of liability were faced by the underwriting agent?
Answer: All of them.
(a) breach of contract
(b) breach of duty of care
(c) breach of fiduciary duty
(d) conspiracy to injure.
10. Which of the following risks does the external reinsurance of the members of a reinsurance pool cover?
Answer:
(a) underwriting losses incurred by the pools members
(b) extended liability in the event of the insolvency of a pool member
(c) breach of duty on the part of the underwriting agent.
11. Which of the following statements concerning the insurable interest of a reinsurer are true?
Answer:
(a) the reinsureds insurable interest is always in its liability
(c) the rules relating to insurable interest under the direct policy apply to reinsurance.

Chapter 3Utmost Good Faith

1. Which of the following statements are correct?
Answer: (c) the reinsured must disclose all material facts which he knew or which he turned a blind eye to.
2. Which of the following statements are correct?
Answer: (a) any material false statement made by the reinsured is a breach of the duty of utmost good faith.
3. In which of the following circumstances is a fact material?
Answer: (a) it was regarded as material by the reinsurers involved.
4. Which of the following must be shown to give rise to inducement?
Answer:
(b) the reinsurers must show that the risk would on the balance of probabilities been written on different terms, or not at all, had full
disclosure been made
(d) the reinsurers can rely upon the presumption of inducement only if they are unable to give their own evidence on inducement.
5. Which of the following facts are material for reinsurance purposes?
Answer:
(b) the reinsureds claims experience
(c) rumours that events giving rise to possible losses have occurred
(d) the dishonesty of the assured.
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6. Which of the following statements are true?

Answer:
(a) a fact need not be disclosed if it was known to the reinsurers
(b) a fact need not be disclosed if it ought to have been known to the reinsurers in the ordinary course of their business.
7. Which of the following statements describes the reinsureds post-contractual duty of utmost good faith?
Answer:
(b) the reinsured is required to disclose facts after the contract has been entered into only if there is a contractual obligation to provide

Robert Merkin

A GUIDE TO REINSURANCE LAW Chapter 12 ANSWERS TO TEST YOURUNDERSTANDING QUESTIONS

1st Edition, 2007

information
(c) the reinsurers may avoid the policy if there is a breach of the continuing duty.
8. Which of the following statements concerning the reinsurers remedies for breach of the duty of utmost good faith are correct?
Answer: (a) the reinsurers can avoid the policy.
9. The reinsurers are entitled to avoid the contract for non-disclosure by the reinsureds brokers in which of the following
circumstances?
Answer:
(a) the facts were not known to the broker but were known to the reinsured
(c) the facts were known to the reinsureds placing broker and were derived from his relationship with the reinsured
(d) the facts were known to the reinsureds placing broker but were derived from general market knowledge.
10. The reinsurers are free by contract term to waive their rights under the duty of utmost good faith in which of the following
circumstances?
Answer:
(a) innocent or negligent failure by the reinsured to disclose material facts
(b) innocent or negligent failure by the reinsureds broker to disclose material facts.

Chapter 4Terms of Reinsurance Agreements

1. Which of the following statements is true?
Answer:
(a) A term may be implied into a reinsurance agreement if the term is necessary to give business efficacy to the agreement
(c) A term may be implied into a reinsurance agreement if there is market evidence of a custom.
2. Which of the following statements is true in relation to the full reinsurance clause?
Answer: (c) The clause incorporates those terms of the direct policy which are germane to reinsurance.
3. Which of the following terms will generally be incorporated by a full reinsurance clause?
Answer:
(a) coverage clauses
(b) claims provisions
(c) warranties.
4. Where a term has been incorporated by a full reinsurance clause, which of the following effects may the term have in the
reinsurance agreement?
Answer: Both.
(a) The incorporated term may operate as a provision which governs the contractual relationship between reinsured and reinsurer
(b) The incorporated term may operate as a statement of the contractual position as between the reinsured and the direct assured.
5. Which of the following conditions are necessary for the incorporation of an arbitration (or exclusive jurisdiction) clause into a
reinsurance agreement?
Answer:
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(b) The arbitration clause must be capable of manipulation so that it can be extended to reinsurance disputes.
(c) There must be an express reference to the arbitration clause in the incorporating words in the reinsurance agreement.
6. Where a warranty has been incorporated from a direct policy governed by a foreign law into a reinsurance agreement governed by
English law, which of the following statements is true?
Answer: (b) The construction of the warranty is to be regarded as governed by the foreign law.
7. Which of the following statements relating to the principle of back to back cover are correct?
Answer:

Robert Merkin

A GUIDE TO REINSURANCE LAW Chapter 12 ANSWERS TO TEST YOURUNDERSTANDING QUESTIONS

1st Edition, 2007

(b) The principle of back to back cover applies only to proportional reinsurances
(d) The principle of back to back cover is a rebuttable rule of construction only.

Chapter 5Rights and Obligations of the Parties

1. Which of the following statements accurately reflect the approach of the courts to the construction of reinsurance agreements?
Answer:
(c) The slip may be taken into account in construing the words of the policy
(d) The courts must take account of the market background against which the policy was written.
2. Which of the following statements is true?
Answer: (a) If the reinsured fails to comply with a condition precedent to the risk, the risk never attaches.
3. Which of the following statements is true?
Answer:
(a) If the reinsured fails to comply with a condition precedent to the reinsurers liability, the reinsurers are not liable
(d) A condition precedent to liability may be created only by unequivocal wording.
4. Which of the following statements is true?
Answer:
(b) If the reinsured fails to comply with a bare condition, the insurers are able to treat the contract as repudiated if the condition is
essential to the policy
(c) If the reinsured fails to comply with a bare condition, the insurers are able to treat the contract as repudiated if the breach is a
serious one
(d) If the reinsured fails to comply with a bare condition the reinsurers may have the right to refuse to pay the claim but not to treat
the policy as repudiated.
5. Which of the following statements are accurate in relation to warranties?
Answer: (b) Breach of warranty automatically terminates the risk.
6. Which of the following statements are true in relation to the payment of the premium under a reinsurance agreement?
Answer: (b) The amount of the premium may be varied during the course of a long-term agreement.
7. Which of the following statements are true in relation to inspection clauses:
Answer:
(b) An inspection clause can be exercised at any time and for any reason, subject to reasonable notice to the reinsured

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(d) An inspection clause cannot be relied upon during proceedings if the reinsurers purpose is to conduct a fishing expedition for
possible defences.

Robert Merkin