A ceding company may purchase what in order to provide economic and surplus protection from a certain catastrophic exposure in lieu of a reinsurance agreement?

Question

Options

• AIndustry Loss Warranty Contract
• BProportional sharing contract
• CTreaty standing agreement
• DExcess of Loss contract

• A
  78% (28)
• B
  6% (2)
• C
  14% (5)
• D
  3% (1)

Explanation

An Industry Loss Warranty (ILW) Contract is an alternative risk transfer instrument - not a traditional reinsurance agreement - that pays out when industry-wide catastrophic losses exceed a specified trigger threshold. Because it is a capital markets product rather than a reinsurance contract, a ceding company can use it in lieu of a reinsurance agreement to obtain surplus and economic protection against catastrophic events like hurricanes or earthquakes.

Why the distractors are wrong:

• B (Proportional sharing contract) and D (Excess of Loss contract) are both actual reinsurance arrangements, not alternatives to one - the question specifically asks for something purchased instead of a reinsurance agreement.
• C (Treaty standing agreement) is not a recognized insurance industry term; reinsurance treaties are themselves reinsurance agreements, which again contradicts the "in lieu of" condition in the question.

Memory tip: Focus on the phrase "in lieu of a reinsurance agreement." ILWs are capital market instruments (alternative risk transfer), not reinsurance contracts - they are the odd one out among the choices, which is exactly why they fit. Remember: ILW = Industry trigger, Instead of reinsurance.

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