SOFA-CFE · Question #238
An insurance company's net loss and loss adjustment expense liabilities are affected by the reinsurance it has purchased from other companies.
The correct answer is A. True. A is correct because reinsurance directly reduces an insurer's net liabilities. When a company cedes (transfers) risk to a reinsurer, it records a reinsurance recoverable - an asset that offsets the gross loss and LAE reserves, lowering the net amount the insurer must carry on…
Question
An insurance company’s net loss and loss adjustment expense liabilities are affected by the reinsurance it has purchased from other companies.
Options
- ATrue
- BFalse
How the community answered
(50 responses)- A72% (36)
- B28% (14)
Explanation
A is correct because reinsurance directly reduces an insurer's net liabilities. When a company cedes (transfers) risk to a reinsurer, it records a reinsurance recoverable - an asset that offsets the gross loss and LAE reserves, lowering the net amount the insurer must carry on its balance sheet. The key word is "net": gross reserves stay the same, but reinsurance reduces what the company is ultimately responsible for.
B is wrong because it would imply reinsurance has no financial impact on liabilities, which contradicts its entire purpose. Reinsurance exists precisely to shift a portion of loss exposure to another party, and that shift is reflected in the insurer's financial statements.
Memory tip: Think of "net" as "after reinsurance" - just like net income is after taxes, net loss liabilities are after cessions to reinsurers. If the question says "net," reinsurance is almost always relevant.
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