If the return on the investments is negative, _______________ owes the ceding company an amount equal to the negative return.

Question

Options

• Aserving company
• Bassuming company
• Cfinancing company
• DCapital Company

• A
  4% (2)
• B
  78% (42)
• C
  13% (7)
• D
  6% (3)

Explanation

Option B is correct because in reinsurance, the assuming company (the reinsurer) accepts - or "assumes" - risk transferred from the ceding company. When investment returns tied to that arrangement turn negative, the assuming company bears that loss and must reimburse the ceding company for the negative return, consistent with its role as the risk-bearer.

Why the distractors are wrong:

• A (serving company): Not a recognized term in reinsurance or insurance law - it's a fabricated distractor.
• C (financing company): While financing companies provide capital, they are not parties to a reinsurance agreement and carry no such obligation to the ceding company.
• D (Capital Company): Similarly not a defined role within the ceding/assuming reinsurance relationship; it's a generic term used as a distractor.

Memory tip: Link the word "assume" to accountability - the assuming company assumes all consequences, positive or negative. If you remember that "ceding = giving away risk" and "assuming = taking on risk," it follows naturally that the assuming company also takes on any financial downside, including negative investment returns.

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