What may be determined as a percentage of the subject base premium, a flat rate, or a rate developed by the reinsured's loss experience?

Question

Options

• AReinsurance income
• BWritten premiums
• CPremiums
• DLoss reserving practices

• A
  10% (4)
• B
  5% (2)
• C
  82% (32)
• D
  3% (1)

Explanation

Reinsurance premiums (C) are the amounts charged by a reinsurer for assuming risk, and they can be structured in exactly these three ways: as a percentage of the cedant's subject base premium, as a flat dollar amount, or as a rate derived from the reinsured's own loss experience through experience rating. This flexibility reflects how reinsurance pricing must adapt to different treaty structures and risk profiles.

Why the distractors fail:

• A (Reinsurance income) is not a pricing mechanism - it refers to the reinsurer's overall revenue stream, which is the result of collecting premiums, not something priced by these methods.
• B (Written premiums) are a financial measure of premiums recorded during a period; they serve as an input to pricing calculations (e.g., the subject base), not as the item being determined.
• D (Loss reserving practices) relate to how future claim liabilities are estimated on a balance sheet - an accounting function entirely separate from premium determination.

Memory tip: Think "3 ways to set the P" - Percentage of base, flat Price, or Performance-based (loss experience). All three methods set the reinsurance Premium.

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