Which items are included in the CAS Working Party recommendation about criteria for reasonably self-evident risk transfer?

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Multiple Choice

Which items are included in the CAS Working Party recommendation about criteria for reasonably self-evident risk transfer?

The idea being tested is whether a reinsurance arrangement truly transfers risk in a way that’s reasonably evident, rather than functioning as a financing tool for the ceding company. The Working Party’s criteria look at economic substance: the reinsurer should bear genuine risk, and the deal shouldn’t rely on arrangements that hide cash flows or dilute risk transfer. - Limiting how big the overall exposure is relative to the contract’s price ensures the reinsurer actually takes on meaningful risk. If the aggregate limits are kept in check—no greater than the per-occurrence limit or not excessively larger than the premium—it signals that the reinsurer is absorbing real potential losses rather than merely deferring payments. - No ceding commissions remove an incentive that could distort the true transfer of risk. When commissions are paid to the ceding company, the structure might be driven by profit on the upfront transfer rather than by genuine risk assumption, so their absence supports genuine risk transfer. - A rate on line under 500% ties the premium to the limit at a reasonable level. If the rate on line is extremely high, the deal may be more about financing or opportunistic pricing than about transferring risk. Keeping it under this threshold helps ensure the contract’s economics align with true risk transfer. All these elements together are why the option including all of them is the best answer.

The idea being tested is whether a reinsurance arrangement truly transfers risk in a way that’s reasonably evident, rather than functioning as a financing tool for the ceding company. The Working Party’s criteria look at economic substance: the reinsurer should bear genuine risk, and the deal shouldn’t rely on arrangements that hide cash flows or dilute risk transfer.

  • Limiting how big the overall exposure is relative to the contract’s price ensures the reinsurer actually takes on meaningful risk. If the aggregate limits are kept in check—no greater than the per-occurrence limit or not excessively larger than the premium—it signals that the reinsurer is absorbing real potential losses rather than merely deferring payments.

  • No ceding commissions remove an incentive that could distort the true transfer of risk. When commissions are paid to the ceding company, the structure might be driven by profit on the upfront transfer rather than by genuine risk assumption, so their absence supports genuine risk transfer.

  • A rate on line under 500% ties the premium to the limit at a reasonable level. If the rate on line is extremely high, the deal may be more about financing or opportunistic pricing than about transferring risk. Keeping it under this threshold helps ensure the contract’s economics align with true risk transfer.

All these elements together are why the option including all of them is the best answer.

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