Casualty Actuarial Society (CAS) Practice Exam

What does a subject premium refer to?

1. The total premium of reinsurers

2. The rate applied to the primary insurer's underlying policies to determine reinsurance premium

3. The premium charged by reinsurers to primary insurers

4. The premium specifically for facultative reinsurance

The correct answer is: The rate applied to the primary insurer's underlying policies to determine reinsurance premium

A subject premium refers specifically to the rate applied to the primary insurer's underlying policies to determine the reinsurance premium. This is the amount that a reinsurer evaluates when considering the risk associated with the policies that the primary insurer is ceding to them. The subject premium acts as the foundation for calculating the reinsurance premium based on the underlying risks identified in the primary insurer's portfolio. This concept is crucial in understanding how reinsurance arrangements are structured and priced. In a reinsurance context, the subject premium allows the reinsurer to assess and quantify the risks it is assuming and helps in determining the appropriate costs associated with covering those risks. It is essential for setting out the financial relationship between the reinsurers and primary insurers based on the risk exposure of the underwritten policies. In contrast, the other options do not accurately characterize the subject premium. The total premium of reinsurers relates to the overall premium collected by reinsurers from all clients, and the premium charged by reinsurers to primary insurers similarly conveys a broader context without focusing on the rate applied specifically to underlying policies. Furthermore, facultative reinsurance refers specifically to a type of reinsurance contract, not a definition of a subject premium. Thus, the definition aligns closely with option B, emphasizing the