IIQE Paper 1 Core Functions of an Insurance Company question: Insurer Q reinsured

IIQE Paper 1Core Functions of an Insurance Company

Insurer Q reinsured 80% of a large fire risk. After a total loss, the reinsurer becomes insolvent. Insurer Q must pay the policyholder:

A 20% of the loss, its retained share
B the full amount payable under the policy
C nothing until the reinsurer's liquidation ends
D its retained share plus any recovery from the liquidator

Show the answer and explanation

Answer: B. the full amount payable under the policy

Answer: the full amount payable under the policy. The insurer is always directly liable to the policyholder for the full amount, whatever the financial condition of its reinsurers.Why not the others:• 20% of the loss, its retained share: retention matters only between insurer and reinsurer.• nothing until the reinsurer's liquidation ends: the policyholder need not wait for the reinsurer.• its retained share plus any recovery from the liquidator: the policyholder's claim does not depend on recoveries.Watch out: Treating the reinsurer's failure as the policyholder's problem.Rule: Reinsurance has no direct effect for the policyholder; the insurer remains fully liable.Source: IA P1 Study Notes 2024 Ed. §4.8(d), p.4/6