What is an agreement by which a transferor increases its surplus to policyholders by the transfer of loss obligations already incurred in excess of the consideration paid?

Question

Options

• ARetroactive reinsurance
• BCorporate expense
• CCapital gains
• DForeign exchange commission

• A
  74% (32)
• B
  14% (6)
• C
  5% (2)
• D
  7% (3)

Explanation

Retroactive reinsurance (A) fits precisely because it describes an arrangement where a cedant (transferor) offloads loss obligations that have already been incurred - past losses - to a reinsurer for a premium less than the expected losses transferred, effectively boosting the cedant's surplus. The key markers in the question are "already incurred" (retrospective, not prospective) and "in excess of consideration paid" (surplus enhancement through favorable transfer pricing).

Why the distractors fail:

• B (Corporate expense) is simply an operating cost of running an insurer - it reduces surplus, not increases it.
• C (Capital gains) refers to profit from selling assets above their purchase price, unrelated to loss obligations or reinsurance agreements.
• D (Foreign exchange commission) involves currency transaction fees or broker compensation in foreign markets - entirely unrelated to transferring loss reserves.

Memory tip: Think "retro = backward in time." Retroactive reinsurance looks backward at losses already on the books, while traditional (prospective) reinsurance covers future losses. If the question mentions "already incurred" losses being transferred for a bargain price that boosts surplus, that's your retroactive reinsurance signal.

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