Registered Insurance Brokers of Ontario (RIBO) Practice Exam

What is it called when an insurer cedes a portion of a risk to a reinsurer?

1. Excess Reinsurance

2. Non-proportional Reinsurance

3. Proportional Reinsurance

4. Shared Risk Reinsurance

The correct answer is: Proportional Reinsurance

The term used when an insurer cedes a portion of a risk to a reinsurer is indeed proportional reinsurance. In this arrangement, the reinsurer receives a specified percentage of the premiums and will also be responsible for the same percentage of any claims that arise. This method allows the primary insurer to spread its risk and gain additional capacity to insure more policies without increasing its overall risk exposure. Proportional reinsurance is beneficial for both the ceding insurer and the reinsurer, as it helps stabilize the insurer's financial position by diversifying risk across more entities. It typically involves ongoing agreements where both parties share the premiums and losses according to a predetermined ratio, which is essential for effective risk management. Other types of reinsurance, such as excess and non-proportional reinsurance, operate differently. In excess reinsurance, the reinsurer only pays for losses that exceed the primary insurer's retention limit. In non-proportional reinsurance, the reinsurer is involved in covering only specified amounts of risk that exceed a threshold, rather than sharing losses in a proportional manner. Shared risk reinsurance is not a standard term used in the context of reinsurance classifications.