Registered Insurance Brokers of Ontario (RIBO) Practice Exam

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What type of insurance arrangement allows for shared risk between an insurer and a reinsurer?

Excess of Loss Reinsurance
Proportional Reinsurance
Facultative Reinsurance
Quota Share Reinsurance

The correct answer is: Proportional Reinsurance

The correct answer is proportional reinsurance. This type of insurance arrangement involves sharing both the premiums and losses between the insurer and reinsurer based on an agreed-upon percentage. In proportional reinsurance, the reinsurer takes on a portion of the risk along with the corresponding premiums, which means that both parties share the financial impacts of the insured risks. In the context of shared risk, it creates a more balanced approach to underwriting and financial stability for the insurer as it can reduce the volatility of loss experience by distributing risk. This arrangement fosters collaboration between the insurer and reinsurer, as both have a monetary interest in the risks they assume together. While other types of reinsurance, such as excess of loss reinsurance, focus on providing coverage for losses exceeding a specified amount without sharing the premiums proportionately, proportional reinsurance ensures a clear and direct sharing arrangement between the two entities. This distinction highlights the reason why proportional reinsurance is the correct choice for an arrangement that specifically allows for shared risk.