Indemnification of a ceding company exists only if both conditions are met.

Prepare for the CAS Exam 6 with detailed study materials. Use flashcards and multiple-choice questions, each with hints and explanations, to get exam-ready!

Indemnification hinges on true risk transfer from the ceding company to the reinsurer, which means two things must be present.

First, there is significant insurance risk involved—this means the reinsurer actually bears risk tied to both when losses happen (timing) and how large those losses can be (amount). If the contract doesn’t expose the reinsurer to meaningful timing and magnitude risk, there isn’t genuine risk transfer.

Second, it must be reasonably possible that the reinsurer will incur a significant loss. There has to be a real, credible chance of a material loss to the reinsurer; if losses are unlikely or the exposure is small, the risk transfer isn’t substantial enough to trigger indemnification.

When both conditions hold, the arrangement reflects true risk transfer and indemnification of the ceding company is present. If either condition fails, indemnification does not exist because the reinsurer isn’t truly taking on the significant risk needed.