Question

Best Reinsurers assumes, under a treaty, all homeowners and personal auto business underwritten by Aurora Insurance Company. On occasion, Aurora will underwrite some homeowners policies with very high value homes. Aurora underwriters have been directed through their underwriting guidelines not to cede high value homes (as in the directive) to the treaty. Although the treaty does not expressly exclude this business, the directive was developed to protect the treaty from unusually high losses. If an application is submitted for a home that falls within the directive and Aurora does not wish to retain the entire risk, what is the best method of handling this submission

Answer 1

Answer: C. Purchase facultative reinsurance and write the policy

Explanation:

The options are:.

A. Purchase another treaty and write the policy

B. Decline the business for reinsurance reasons

C. Purchase facultative reinsurance and write the policy

D. Cede the policy to the existing treaty if the risk is acceptable

Based on the information given, we should note that in a case whereby an application is submitted for a home which falls within the directive and Aurora does not wish to retain the entire risk, the best method of handling this submission will be to buy a facultative reinsurance and then write the policy.

A facultative reinsurance is the coverage that is bought by a primary insurer in order to cover a particular risk. Hence, it'll be used to cover the single risk in this case.