Granite Insurance Company entered into a treaty reinsurance agreement with Rock Solid Reinsurance (RSR). Granite's retention limit is 400,000 and RSR agreed to provide reinsurance for up to 2.0 million.
If Granite writes an 800,000 policy, RSR is responsible for 50 percent of the losses. If Granite insures a 1.6 million risk, RSR is responsible for 25 percent of any losses. What type of reinsurance arrangement did Granite enter into with RSR?
A) facultative reinsurance
B) surplus share reinsurance
C) quota share reinsurance
D) excess of loss reinsurance
Question 2
When a fraternal insurer began operations, it asked each member, regardless of age, to pay 20 per month to the fraternal's group life insurance plan. In exchange, each member received the same amount of life insurance.
Soon younger members of the group began to drop out when they realized their premiums were subsidizing a group with a higher chance of loss. Which important underwriting principle was violated in this case?
A) An underwriting profit should be attained.
B) Moral hazard should be avoided.
C) Insureds should be selected according to underwriting standards.
D) There should be equity among policyholders.
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