Casualty Actuarial Society (CAS) Practice Exam

What role do underwriting guidelines play in adhering to reinsurance treaty limitations?

1. They define the limits of loss exposures

2. They ensure decision-making authority is decentralized

3. They include punitive measures for exceeding limits

4. They ensure coverage limits align with treaty limitations

The correct answer is: They ensure coverage limits align with treaty limitations

Underwriting guidelines serve a critical function in ensuring that the coverage limits provided by an insurer are consistent with the limitations specified in reinsurance treaties. These guidelines are established to provide a framework that governs how risks are assessed, accepted, and priced. By aligning coverage limits with treaty limitations, underwriting guidelines help avoid potential disputes between the insurer and reinsurer regarding risk sharing. When an insurer issues policies, adherence to the established guidelines ensures that loss exposures are not exceeded, thus maintaining the financial integrity and capability of the reinsurer to cover losses. The guidelines restrict the types of coverage and the amounts insured in such a way that protects both the insurer and reinsurer from excessive risk accumulation. In summary, underwriting guidelines are essential in ensuring that the insurer's exposure aligns with the reinsurance treaty, which ultimately facilitates better risk management and stability within the insurance market.