Which of the following is the condition, which must be met, for a contract to indemnify the ceding company against loss or liability relating to insurance risk?

Question

Options

• AThe reinsurer has assumed significant risk
• BIt is reasonably possible that the reinsurer may realize a significant loss
• CBoth A and B
• DNeither A nor B

• A
  3% (1)
• B
  5% (2)
• C
  76% (28)
• D
  16% (6)

Explanation

Option C is correct because reinsurance accounting standards (such as FASB ASC 944 / FAS 113) require both conditions to be satisfied simultaneously for a contract to qualify as true risk-transfer reinsurance. If either condition is absent, the contract must be accounted for as a deposit rather than as reinsurance indemnifying the ceding company.

Why A alone is wrong: Significant risk assumption by the reinsurer is necessary but not sufficient. Without the second condition, there is no meaningful possibility of actual loss to the reinsurer - the risk assumed could be entirely theoretical.

Why B alone is wrong: The possibility of a significant loss to the reinsurer only matters if that risk was actually transferred to them in the first place. Without condition A, no genuine insurance risk has been assumed.

Why D is wrong: Both conditions are in fact required and codified in reinsurance accounting standards, so "neither" is factually incorrect.

Memory tip: Think of it as a two-key lock - you need both keys to open the door to reinsurance treatment. Key 1 = reinsurer assumes significant risk (the transfer). Key 2 = significant loss is reasonably possible (the consequence). One key alone won't open the lock.

No community discussion yet for this question.