Section II: Short Answer Questions $(60$ marks$)$

Question $1(10$ marks$)$ ABC insurance company enters a quota share reinsurance treaty with XYX reinsurance company. This reinsurance treaty has contractual clauses regarding $(1)$ a reinsurance commission; $(2)$ a profit commission; $(3)$ a loss corridor.

$1\mathrm{.}1$ Explain the rationale for the usage of reinsurance commission in this reinsurance treaty. $(5$ marks$)$

$1\mathrm{.}2$ Explain what is a loss corridor $(2$ marks$),$ and the rationale for the usage of a loss corridor in the reinsurance treaty. $(3$ marks$)$

Question $2(15$ marks$)$ ABC insurance company has two lines of insurance business:

Portfolio A: risks are relatively homogenous with similar sizes and risk profiles

Portfolio B: risks are quite heterogenous with dissimilar sizes and some risks are quite hazardous

$2\mathrm{.}1$ Name one proportional reinsurance that is appropriate for ABC insurance company to transfer some liabilities of Portfolio A$.(3$ marks$)$

Discuss the impacts of the proposed reinsurance on ABC insurance company's income statement. $(3$ marks$)$

$2\mathrm{.}2$ ABC insurance company is concerned about the potential exposure of Portfolio A to certain natural catastrophes that can cause correlated losses and would like to further limit its retention under proportional reinsurance proposed in $2\mathrm{.}1.$ Explain how ABC insurance can achieve this objective. $(5$ marks$)$

$2\mathrm{.}3$ Due to the nature of the risk in Portfolio B$,$ some large and hazardous risks are excluded from the treaty reinsurance between ABC insurance company and its treaty reinsurer. Name two options for ABC insurance company to obtain reinsurance coverage for these excluded risks. $(4$ marks$)$