If the referenced investment portfolio return is positive, the ceding company owes the return to the ceding company.

Question

Options

• ATrue
• BFalse

• A
  78% (36)
• B
  22% (10)

Explanation

Note: The question contains an apparent typo - the second "ceding company" should read "reinsurer." The intended statement is: "If the referenced investment portfolio return is positive, the ceding company owes the return to the reinsurer."

Option A (True) is correct because this describes the mechanics of Modified Coinsurance (ModCo) reinsurance. In a ModCo arrangement, the ceding company retains the assets backing the reserves, but must pass along the investment return on that segregated portfolio to the reinsurer. When the portfolio earns a positive return, the ceding company is obligated to remit that return - this is the reinsurer's compensation for bearing the insurance risk while the ceding company holds the assets.

Option B (False) is wrong because the flow of funds is not optional or reversed - the settlement of investment returns is a contractual obligation built into ModCo and similar financial reinsurance structures, not a discretionary transfer.

Memory tip: Think of ModCo as a "hold the assets, pass the yield" deal - the ceding company keeps custody, but the yield belongs to the reinsurer. Positive return = ceding company pays out; negative return = reinsurer pays back.

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