CMFAS CACS – Client Advisor Competency Standards (CACS) ​Paper 2 Exam

Correct: In non-proportional treaty design, such as Excess of Loss, the attachment point is the financial threshold or ‘deductible’ that the cedant retains. The reinsurer only pays for the portion of a loss that exceeds this point. Under MAS Guidelines on Reinsurance Management, insurers in Singapore must ensure that their retention levels (attachment points) are appropriate relative to their financial resources and risk appetite.

Incorrect: The maximum amount of indemnity refers to the ‘limit’ of the treaty, not the attachment point. A fixed percentage of every risk describes proportional reinsurance, such as a Quota Share treaty, rather than the layered structure of non-proportional reinsurance. The date and time of coverage refer to the inception or attachment date of the contract, which is a temporal boundary rather than a financial loss threshold.

Takeaway: The attachment point defines the cedant’s retention in a non-proportional treaty, marking the level where the reinsurer’s liability begins for losses exceeding that amount.

Correct: Under the principle of indemnity as applied in Singapore insurance law, a reinsurer is generally only required to indemnify the ceding company for losses that the ceding company was legally liable to pay under the terms of the original insurance policy. Since the 1 million SGD was an ex-gratia payment (a payment made out of favor rather than legal obligation) and the loss was specifically excluded, it falls outside the scope of indemnity. The reinsurer’s obligation is to restore the insurer to the position it would have been in had the covered loss not occurred, which in this case is the 9 million SGD of covered loss.

Incorrect: The approach suggesting the reinsurer must pay the full amount based on follow the settlements is incorrect because that clause typically only binds the reinsurer to settlements that fall within the risks covered by both the original policy and the reinsurance treaty; it does not extend to ex-gratia payments unless specifically stated. The approach suggesting indemnity requires full restoration regardless of policy terms is a misunderstanding, as indemnity is limited by the contract’s legal boundaries. The approach regarding the prevention of legal costs is incorrect because indemnity is based on actual covered loss rather than speculative cost-saving measures unless a ‘sue and labor’ or similar clause specifically allows for such recoveries.

Takeaway: In reinsurance, the principle of indemnity limits the reinsurer’s liability to the ceding company’s actual legal liability under the original policy, excluding voluntary or ex-gratia payments.

Correct: In a surplus treaty, the ‘line’ is defined as the ceding company’s net retention for a particular risk. The treaty capacity is then expressed as a number of these lines (e.g., a 10-line surplus). This allows the ceding company to vary its retention based on risk classification (keeping more for better risks and less for poorer risks) while the treaty capacity scales accordingly. This is a fundamental feature of proportional reinsurance used by insurers in Singapore to manage large property exposures under the Insurance Act framework.

Incorrect: The suggestion that a fixed percentage of every risk must be ceded describes a Quota Share treaty, not a Surplus treaty. The claim that a surplus treaty is a non-proportional arrangement is incorrect, as it is a form of proportional reinsurance where premiums and losses are shared based on the proportion of the risk ceded. Defining a ‘line’ as a fixed maximum limit for the entire treaty period is also incorrect, as the line is a unit of retention that determines the capacity on a per-risk basis rather than a global treaty limit.

Takeaway: In surplus reinsurance, the treaty capacity is intrinsically linked to the ceding company’s net retention, with one line representing the amount retained by the insurer for its own account.

Correct: Retrocession is ‘reinsurance for reinsurers.’ In the context of Singapore as a global hub, it allows local reinsurers to distribute their concentrated risks to the global market. This risk distribution is essential for managing capital requirements under the MAS Risk-Based Capital (RBC 2) framework. By reducing their net exposure, reinsurers can maintain solvency margins while having the financial ‘room’ to underwrite more significant and diverse risks across the region, which strengthens Singapore’s position as a central marketplace for risk.

Incorrect: The suggestion that retrocession is a state-mandated fixed percentage is incorrect, as retrocession is a commercial decision based on risk appetite and capital management. Retrocession does not eliminate credit risk; in fact, it introduces ‘retrocessionaire default risk’ which must be monitored under MAS guidelines. Furthermore, retrocession does not allow firms to bypass RBC 2 requirements; while it provides capital relief, the reinsurer must still account for the counterparty risk of the retrocessionaire and remains primary liable to its own cedants.

Takeaway: Retrocession facilitates the global distribution of risk, allowing Singapore reinsurers to optimize capital efficiency and increase their capacity to lead large-scale regional insurance programs.

Correct: Under the Insurance (Lloyd’s Asia Scheme) Regulations, underwriting members of Lloyd’s are permitted to carry on insurance business in Singapore as authorized insurers. They do this by appointing service companies (which are Singapore-incorporated companies) to act as their agents. These service companies negotiate and bind contracts on behalf of the syndicates, and the entire scheme is overseen by a Scheme Manager who handles administrative and regulatory interactions with the Monetary Authority of Singapore (MAS).

Incorrect: The suggestion that they must apply for individual direct insurer licenses is incorrect because the Lloyd’s Asia Scheme provides a collective regulatory framework that bypasses the need for individual Section 8 licenses for every syndicate member. Classifying them as representative offices is incorrect because service companies in the Lloyd’s Asia Scheme have the authority to conduct insurance business and bind risks, which representative offices cannot do. Treating them as exempt insurance brokers under the Financial Advisers Act is incorrect because Lloyd’s Asia members are underwriters (insurers) of risk, not merely intermediaries or brokers, and they are primarily governed by the Insurance Act and its specific Lloyd’s Asia regulations.

Takeaway: Lloyd’s Asia members operate as authorized insurers in Singapore through a specialized scheme framework where service companies act as agents for syndicates under MAS oversight.

Correct: In the Singapore reinsurance market, the slip serves as the primary evidence of the contract until the formal wording is issued. Contract Certainty, a principle supported by MAS and the Singapore Reinsurers’ Association (SRA), requires that all terms and conditions are clearly agreed upon before inception. Inconsistencies between the slip and the final wording lead to legal ambiguity, which can result in disputes over the intent of the parties and significantly delay the settlement of claims, undermining the stability of the insurance ecosystem.

Incorrect: The suggestion that a treaty is automatically voided is incorrect; while a discrepancy makes the contract difficult to enforce or interpret, it does not trigger an automatic statutory voiding under the Insurance Act. Reporting to the Singapore Exchange (SGX) is not a standard requirement for individual reinsurance slip discrepancies unless they represent a systemic failure or a material financial event for a listed entity. The Financial Advisers Act (FAA) governs the conduct of financial advisers, but it does not contain a provision that shifts the entire insurance liability of a risk from a reinsurer to a broker due to a wording delay.

Takeaway: Contract certainty in Singapore requires that the reinsurance slip and wording are fully aligned and agreed upon at inception to prevent legal disputes and ensure prompt claims settlement.

Correct: Treaty reinsurance is an obligatory contract where the reinsurer agrees in advance to cover a specific class of business, providing automatic coverage for risks meeting the criteria. In contrast, facultative reinsurance is negotiated for a single specific risk, giving the reinsurer the autonomy to perform its own underwriting and decide whether to participate on a case-by-case basis.

Incorrect: The suggestion that facultative reinsurance is for high-volume risks is incorrect, as it is actually used for specific, often complex or high-value risks that do not fit into a standard treaty. The claim that MAS mandates a 50% facultative split is factually incorrect; while MAS oversees risk management frameworks, it does not dictate specific commercial percentage splits between treaty and facultative placements. The description of treaty reinsurance providing individual risk selection is the opposite of how treaties function, as treaties are designed for automatic portfolio-wide coverage.

Takeaway: The fundamental difference lies in the obligation: treaty reinsurance is an automatic, portfolio-wide agreement, while facultative reinsurance is a case-by-case arrangement for specific risks.

Correct: In Singapore proportional treaties, a cash loss clause is a liquidity provision. It allows the ceding insurer to request immediate payment for a specific large loss that exceeds a predefined limit (the cash loss limit) set out in the treaty. This bypasses the usual ‘account current’ system where balances are settled quarterly. To invoke it, the loss must meet the financial threshold and the insurer must formally notify the reinsurer of the intent to collect the cash loss.

Incorrect: The cash loss clause is not triggered by the existence of a complaint or MAS fair dealing guidelines, but by the size of the loss itself. Waiting for the quarterly statement is the standard procedure that the cash loss clause is specifically designed to avoid. The exhaustion of the total net retention for the year refers to aggregate stop-loss or excess of loss structures, not the operational trigger for a cash loss in a proportional treaty.

Takeaway: The cash loss clause provides a mechanism for ceding insurers to recover large individual claims immediately from reinsurers when they exceed a specific treaty threshold, ensuring liquidity outside the normal quarterly settlement cycle.

Correct: Under MAS guidelines and the Risk-Based Capital (RBC 2) framework, a licensed insurer in Singapore cannot act as a mere ‘front’ or ‘post box.’ Even when a significant portion of risk is ceded, the insurer remains legally liable to the policyholder. Therefore, MAS requires the insurer to perform its own due diligence, exercise underwriting control, and maintain sufficient capital to buffer against the risk that the reinsurer might default on its obligations.

Incorrect: The suggestion that 100% ceding removes capital requirements is incorrect because the local insurer retains the primary legal liability to the insured. MAS does not grant exemptions based solely on the currency of the premium or the sophistication of the investor for basic solvency and fronting rules. Classifying an insurance contract as a brokerage service to bypass the Insurance Act is a regulatory violation and does not reflect the legal reality of the insurer’s obligations.

Takeaway: MAS requires insurers involved in fronting to maintain substantive operational involvement and hold regulatory capital against counterparty credit risks.

Correct: A Stop Loss or Aggregate Excess of Loss treaty is designed to protect the insurer’s overall financial results over a period (usually one year). It triggers when the total sum of all losses (the aggregate) exceeds a specified amount or a percentage of premium (loss ratio). This is particularly useful for portfolios with high-frequency, low-severity claims like motor or WICA in Singapore, where the concern is the total volume of claims rather than a single catastrophic event.

Incorrect: The description of indemnity for a single large event refers to per-occurrence or per-risk excess of loss treaties, not aggregate structures. The sharing of premiums and losses by a fixed percentage describes proportional reinsurance, such as Quota Share, which differs from the non-proportional nature of Stop Loss. While the Monetary Authority of Singapore (MAS) requires insurers to have adequate reinsurance under the Risk-Based Capital (RBC 2) framework and Guidelines on Risk Management, it does not mandate specific Stop Loss treaties or prescribe universal loss ratio caps for all insurers.

Takeaway: Stop Loss reinsurance protects a cedant’s aggregate annual results by capping the total loss impact once a predetermined threshold or loss ratio is reached.

Correct: Under Singapore common law, which aligns with established reinsurance principles, a follow-the-settlements clause requires the cedant to meet two conditions to bind the reinsurer: the claim must fall within the risks covered by the reinsurance contract as a matter of law, and the cedant must have acted honestly and taken all proper and business-like steps in reaching the settlement. Demonstrating these two elements is the most effective way to ensure the settlement is enforceable against the reinsurer.

Incorrect: Relying on follow-the-fortunes to override treaty exclusions is incorrect because a reinsurance contract’s specific terms and exclusions always take precedence over general settlement clauses. Requiring a signed waiver of subrogation for every claim is an administrative procedure that does not address the legal requirements of follow-the-settlements interpretation. Requiring court adjudication for every claim is commercially impractical and ignores the primary purpose of follow-the-settlements clauses, which is to facilitate efficient out-of-court settlements.

Takeaway: To enforce a follow-the-settlements clause in Singapore, the cedant must prove the loss is covered by the reinsurance treaty and that the settlement was handled in a professional, business-like manner.

Correct: In Singapore’s reinsurance market, proportional treaties typically include a ‘cash loss’ clause. This allows the ceding company to request immediate payment for individual losses that exceed a specified threshold, rather than waiting for the usual quarterly bordereaux settlement. This mechanism is vital for maintaining the cedant’s liquidity and is a standard accounting practice recognized under the Insurance Act for financial stability.

Incorrect: Holding large claims until the end of the quarter (Option B) is incorrect because it ignores the liquidity needs of the ceding company, which the cash loss clause is specifically designed to protect. Offsetting against future premiums (Option C) is not standard for large losses as it delays the necessary cash infusion for the cedant. Converting proportional losses into non-proportional facultative obligations (Option D) is a misunderstanding of contract law; the accounting treatment of a loss does not change the fundamental legal structure of the reinsurance treaty.

Takeaway: Cash loss provisions in proportional reinsurance allow for the immediate settlement of large claims outside the standard bordereaux cycle to support the cedant’s liquidity.

Correct: In Singapore, the principle of Utmost Good Faith (Uberrimae Fidei) imposes a positive duty on the prospective cedant to disclose all material facts to the reinsurer before the contract is concluded. A material fact is defined as any circumstance that would influence the mind of a prudent reinsurer in deciding whether to accept the risk and on what terms. Since a change in risk appetite affects the nature of the risks being ceded, it is a material fact that must be disclosed proactively, regardless of whether a specific question was asked.

Incorrect: The duty of disclosure is proactive and not limited to answering specific questions from the reinsurer, making the reactive approach incorrect. Waiting until an interim review is a breach of the pre-contractual duty of disclosure which must be fulfilled before the treaty is bound. The ‘follow the fortunes’ clause applies to the reinsurer’s obligation to follow the cedant’s claims settlements and underwriting actions during the life of the contract, but it does not waive the fundamental pre-contractual duty of Utmost Good Faith regarding material facts.

Takeaway: The principle of Utmost Good Faith in Singapore requires the proactive disclosure of all material facts that would influence a prudent reinsurer’s assessment of the risk prior to the inception of the contract.

Correct: Under the MAS Guidelines on Corporate Governance and the Insurance (Corporate Governance) Regulations, where the Chairman is not an independent director, independent directors should make up at least a majority of the Board. This ensures a sufficiently strong independent element on the Board to exercise objective judgment and provide effective checks and balances over management and substantial shareholders.

Incorrect: The requirement for independent directors to make up at least one-third of the Board applies only when the Chairman is an independent director; otherwise, a majority is required. Having only two independent directors is insufficient for locally incorporated insurers under MAS expectations. While appointing a Lead Independent Director is a recommended practice when the Chairman is not independent, it does not negate the requirement for a majority of the Board to be independent.

Takeaway: For Singapore-incorporated insurers and reinsurers, if the Chairman is not independent, the Board must be comprised of a majority of independent directors to ensure robust corporate governance.

Correct: According to the SIAC Rules, which are commonly incorporated into Singapore reinsurance contracts, if the parties or the party-nominated arbitrators fail to reach an agreement on the appointment of an arbitrator, the President of the SIAC Court of Arbitration serves as the appointing authority. This ensures the arbitration process can proceed efficiently without being stalled by procedural disagreements.

Incorrect: The Monetary Authority of Singapore (MAS) does not involve itself in the appointment of arbitrators for private commercial disputes. The Singapore High Court generally only intervenes in arbitration appointments if the specified appointing authority fails to act or if no authority was named under the International Arbitration Act. FIDReC is primarily for consumer-to-financial institution disputes and is not the default venue for commercial reinsurance treaty arbitrations between professional entities.

Takeaway: Under SIAC Rules, the President of the SIAC Court of Arbitration acts as the default appointing authority to resolve deadlocks in the formation of an arbitral tribunal.

Correct: In Singapore reinsurance practice, the Hours Clause (often 72 hours for windstorms or 168 hours for floods) allows the reinsured (the cedant) the discretion to choose the starting point of the period. This flexibility enables the cedant to aggregate the maximum amount of loss into a single ‘occurrence’ to minimize the impact of multiple deductibles, provided the chosen periods do not overlap and the losses fall within the policy duration.

Incorrect: The suggestion that the start time is fixed by a government body like the National Environment Agency is incorrect as the clause is a contractual agreement providing flexibility to the cedant. Mandating the start at the first business day after notification is not a standard feature of the Hours Clause and would unfairly penalize the cedant for timing. While Singapore is small, the 24-hour limitation is not a standard market practice; standard durations like 72 or 168 hours are typically used regardless of the country’s size to align with international reinsurance standards.

Takeaway: The Hours Clause grants the reinsured the right to determine the start of the specified hourly window to maximize loss recovery under a single occurrence.

Correct: Reinsurance provides capacity expansion by allowing an insurer to write larger risks than its own capital base would normally permit. In the Singapore context, under the MAS Risk-Based Capital (RBC 2) framework, an effective reinsurance arrangement allows the insurer to recognize the risk transfer, which can reduce the amount of capital the insurer is required to hold for those specific risks. This enables the insurer to take on larger industrial risks while remaining within regulatory solvency requirements.

Incorrect: The option regarding the Reinsurance Management Strategy (RMS) pool is incorrect because the RMS is a required internal policy framework for insurers to manage their reinsurance, not a physical pool that eliminates capital charges. The option suggesting a MAS statutory guarantee is incorrect as reinsurance is a private contractual arrangement and MAS does not guarantee or reimburse losses for private insurers. The option regarding bypassing reporting requirements is incorrect because MAS requires transparent reporting of both gross and net exposures; reinsurance is a risk management tool, not a method to circumvent regulatory reporting or limits.

Takeaway: Reinsurance expands an insurer’s underwriting capacity by allowing it to accept larger risks than its capital base permits while optimizing capital efficiency under Singapore’s RBC 2 framework.

Correct: In a clean-cut portfolio transfer under the Singapore Insurance Act, the transferee assumes the liability for all unexpired risks. To facilitate this, the transferor pays the transferee a ‘portfolio entry’ premium. This amount is typically equivalent to the Unearned Premium Reserve (UPR) at the date of transfer, often adjusted by a commission (portfolio withdrawal commission) to compensate the transferor for the acquisition costs it has already paid to secure the business.

Incorrect: Retaining the UPR for twenty-four months is incorrect because a clean-cut transfer involves the immediate transfer of the liability and the corresponding reserves to the transferee. The Monetary Authority of Singapore (MAS) does not hold UPR in a central insurance fund for private transfers; reserves remain with the licensed insurers. Ignoring the existing UPR and establishing reserves based solely on asset market value is not consistent with actuarial principles or Singapore’s financial reporting standards for insurance contracts.

Takeaway: In a Singapore portfolio transfer, the UPR is transferred to the transferee as a portfolio entry premium to ensure the new insurer has the necessary funds to cover future claims for the unexpired risk period.

Correct: In Singapore, the Monetary Authority of Singapore (MAS) regulates captive insurers under the Insurance Act. A key requirement for a captive insurer is maintaining a minimum paid-up capital of S$400,000. Additionally, the scope of a captive’s business is legally restricted to insuring or reinsuring the risks of its parent company and related corporations, rather than the general public or unrelated third parties.

Incorrect: The suggestion that a captive can provide services to third-party commercial clients is incorrect because captives are specifically restricted to related-party risks. The claim that captives are exempt from the Insurance Act or must register with the SGX is false, as MAS is the sole regulator for insurance activities in Singapore. While there are management requirements, the requirement for five resident directors is not a standard licensing threshold for captives, and they do not hold a full general insurance license which is meant for open-market insurers.

Takeaway: Captive reinsurers in Singapore must maintain a minimum paid-up capital of S$400,000 and are restricted to covering risks of their parent and related entities under MAS regulations.

Correct: Under the MAS RBC 2 framework, the Matching Adjustment (MA) is a key feature for long-term business. It allows reinsurers to adjust the risk-free discount rate used to value liabilities if those liabilities are matched by a specific portfolio of assets held to maturity. This recognizes that the reinsurer is not exposed to the risk of changing credit spreads for those assets, as they do not intend to sell them. This reduces the volatility of the solvency ratio by ensuring that movements in asset spreads are offset by movements in the valuation of the liabilities.

Incorrect: The suggestion that the MA is a fixed capital add-on for failing to meet the MCR is incorrect, as the MA is a valuation adjustment, not a penalty or a buffer for non-compliance. The idea that the MA is an automatic liquidity premium for all assets is also incorrect; it is a specific adjustment to the liability discount rate and is subject to strict eligibility and matching criteria. Finally, the Singapore Exchange (SGX) does not grant waivers for RBC 2 capital requirements or operational risk charges, as these are under the direct regulatory purview of the Monetary Authority of Singapore (MAS) under the Insurance Act.

Takeaway: The Matching Adjustment in Singapore’s RBC 2 framework stabilizes a reinsurer’s solvency position by aligning the valuation of long-term liabilities with the yields of matching assets, mitigating the impact of market spread volatility.

Correct: In the context of Singapore’s insurance regulatory environment, specifically regarding risk management and capital efficiency, the attachment point (or retention) should be set based on the insurer’s ability to absorb losses. If an attachment point is too low, the insurer is effectively ‘trading dollars’ with the reinsurer, paying high premiums for losses it could comfortably retain. The best next step is to align the treaty design with the insurer’s risk appetite and capital position to ensure the reinsurance program is cost-effective and protects against truly volatile or catastrophic events.

Incorrect: Increasing the limit without addressing the attachment point does not solve the issue of high premiums for attritional losses. Transitioning to a surplus treaty changes the fundamental nature of the risk transfer from non-proportional to proportional, which may not be suitable for catastrophe protection and does not address the specific issue of attachment point efficiency. Lowering the attachment point further would aggravate the problem by increasing the frequency of reinsurance recoveries and significantly raising the premium costs, which contradicts the goal of efficient capital management.

Takeaway: The attachment point in a non-proportional treaty must be strategically calibrated to balance the cost of reinsurance against the insurer’s internal capital strength and risk retention goals.

Correct: In Singapore proportional treaties, the deficit carry-forward is a standard feature of profit commission clauses. It ensures that the reinsurer does not pay a profit commission in a year that shows a technical profit if there are outstanding losses from previous years that have not yet been recovered. This mechanism protects the reinsurer’s long-term position and ensures that the ‘profit’ being shared is a true net profit over the duration of the relationship.

Incorrect: Refunding ceding commissions based on technical losses is not the function of a deficit carry-forward clause; ceding commissions are intended to cover the ceding company’s acquisition and administrative costs. Statutory reserves are governed by MAS solvency requirements and are distinct from the contractual profit commission calculations between parties. Ignoring catastrophic losses in a profit commission calculation would be highly unusual and would not represent a standard ‘deficit carry-forward’ mechanism, which is designed to account for all technical losses.

Takeaway: The deficit carry-forward mechanism ensures that profit commissions are only paid after the reinsurer has recouped net losses from previous accounting periods within the treaty’s scope.

Correct: Under the Singapore Insurance Act and established common law principles applicable in Singapore, a contract of insurance (which includes reinsurance) requires the existence of an insurable interest. Without this interest, the contract is essentially a wagering agreement, which is void and unenforceable. For general insurance risks, the ceding company must demonstrate an insurable interest at the time of the loss to claim an indemnity, ensuring the contract serves its purpose of risk transfer rather than speculation.

Incorrect: The payment of premium or the issuance of a cover note does not override the statutory and common law requirement for insurable interest; a contract lacking this interest is void from the outset regardless of administrative actions. The Securities and Futures Act (SFA) does not automatically reclassify void insurance contracts as derivatives to save their validity. Furthermore, the validity of a contract regarding insurable interest is a matter of law and contract enforceability in court, not a discretionary decision made by the Monetary Authority of Singapore (MAS) on a case-by-case basis.

Takeaway: In Singapore, the existence of an insurable interest is a mandatory legal requirement for the formation of a valid reinsurance contract, and its absence renders the contract void.

Correct: The fundamental distinction lies in the ‘case-by-case’ nature of facultative reinsurance. In the Singapore market, as elsewhere, facultative reinsurance involves the reinsurer assessing each risk individually and deciding whether to accept it. Conversely, a treaty is an agreement where the ceding company agrees to cede, and the reinsurer agrees to accept, all risks that fall within the treaty’s terms without the reinsurer reviewing each individual risk at the time of attachment.

Incorrect: The suggestion that facultative reinsurance is for high-frequency risks is incorrect; it is typically used for large or unusual risks that exceed treaty limits. The claim that treaty reinsurance requires separate policy documents for every risk is the opposite of actual practice, as treaties cover portfolios. There is no MAS mandate requiring facultative placement before treaty placement; the choice of reinsurance method is a strategic decision based on the insurer’s risk appetite and capacity.

Takeaway: The key difference is that facultative reinsurance allows for individual risk selection by the reinsurer, while treaty reinsurance involves the obligatory acceptance of a defined class of risks.

Correct: Under the Singapore Insurance Act, the Monetary Authority of Singapore (MAS) provides a framework for foreign reinsurers to become ‘authorized reinsurers.’ This status allows them to carry on reinsurance business in Singapore without a physical branch or office. To be authorized, the reinsurer must satisfy MAS regarding its financial standing, the quality of its management, and the adequacy of the regulatory supervision in its home jurisdiction. This ensures that the Singapore insurance market remains protected while allowing for global capacity.

Incorrect: Operating under a representative office is incorrect because representative offices in Singapore are strictly prohibited from carrying on business, which includes underwriting or signing contracts. The concept of an incidental business exemption that allows active solicitation without a license is a misconception; the Insurance Act generally requires licensing or authorization for anyone carrying on insurance business in Singapore. The Securities and Futures Act (SFA) primarily governs capital markets and does not grant automatic waivers for reinsurance activities, which are specifically governed by the Insurance Act.

Takeaway: Foreign reinsurers must obtain authorized reinsurer status from MAS to legally provide reinsurance to the Singapore market without establishing a physical presence in the country.

Correct: Approach 1 is correct because Aggregate Excess of Loss (Stop Loss) is fundamentally a tool for volatility management and capital protection. In Singapore, the Monetary Authority of Singapore (MAS) requires that reinsurance arrangements involve a genuine transfer of risk to be recognized for capital relief under the Risk-Based Capital (RBC 2) framework. By protecting the net loss ratio, the insurer ensures that its capital remains stable even in years with an unusually high frequency of claims across the portfolio.

Incorrect: Approach 2 is incorrect because Stop Loss is not intended to be an administrative tool for high-frequency claims; such claims are typically managed through deductibles or primary insurance layers. Furthermore, ignoring the impact on the solvency margin would violate MAS’s expectations for prudent risk management. Option C is incorrect because all licensed insurers in Singapore, whether public or private, must comply with the Insurance Act and the RBC 2 framework. Option D is incorrect because the primary metric for solvency in Singapore is the Capital Adequacy Ratio (CAR) under RBC 2, not just a simple liquidity ratio, and Stop Loss is specifically designed for loss protection rather than liquidity management.

Takeaway: In the Singapore regulatory environment, Aggregate Excess of Loss structures must demonstrate genuine risk transfer to support capital adequacy and solvency under the RBC 2 framework.

Correct: In Singapore proportional reinsurance treaties, a cash loss clause is a liquidity facility. It allows the ceding company to request immediate payment for a specific large loss that exceeds a pre-defined limit (the cash loss limit). This payment is made ‘outside’ the normal periodic (usually quarterly) accounting cycle to ensure the cedant has sufficient cash flow to pay the policyholder. Standard market practice in Singapore dictates that once the threshold is met for a single occurrence, the reinsurer must pay within a short window, often 7 to 15 days.

Incorrect: Aggregating small losses to meet a threshold is generally not permitted under standard cash loss clauses, which focus on individual large shocks. Tying the payment to MAS Risk-Based Capital (RBC) requirements is incorrect as the clause is a contractual liquidity tool, not a regulatory solvency trigger. While premium reserves exist, a cash loss clause specifically demands the actual transfer of funds to provide immediate liquidity, rather than just a book entry against reserves.

Takeaway: Cash loss clauses provide essential liquidity by requiring reinsurers to pay large individual claims immediately outside the standard quarterly accounting framework.

Correct: Under the Singapore Insurance Act, foreign reinsurers that do not have a physical presence or branch in Singapore must be granted ‘Authorized Reinsurer’ status by the Monetary Authority of Singapore (MAS). This status allows them to carry on the business of providing reinsurance of risks to insurers in Singapore, provided they comply with the specific requirements set out in the Insurance (Authorized Reinsurers) Regulations, which include financial standing and supervision standards.

Incorrect: Maintaining a representative office is insufficient because representative offices in Singapore are prohibited from carrying on any core business activities, including underwriting or concluding contracts. The Securities and Futures Act (SFA) governs capital markets and intermediaries, not the licensing of reinsurers. The Financial Advisers Act (FAA) relates to the provision of financial advice and the sale of investment products, and its definitions of sophisticated investors do not grant exemptions for reinsurance licensing under the Insurance Act.

Takeaway: Foreign reinsurers without a physical Singapore presence must be MAS-authorized under the Insurance Act to legally provide reinsurance to the local market.

Correct: Retrocession allows Singapore-based reinsurers to manage their risk accumulation and capital more effectively. By ceding portions of their portfolio to other global retrocessionaires, they can take on larger risks within the region, supporting Singapore’s goal of being a leading global hub for risk transfer. This aligns with the MAS objective of maintaining a robust and stable financial sector while allowing firms to optimize their capital efficiency under the Risk-Based Capital (RBC 2) framework.

Incorrect: Option B is incorrect because the MAS does not mandate a specific fixed percentage for retrocession; instead, it focuses on risk-based capital and sound underwriting practices. Option C is incorrect because retroceded risks must still be accounted for in regulatory reporting and do not provide a blanket exclusion from exposure limits; the credit for reinsurance is subject to specific regulatory criteria. Option D is incorrect because retrocession has a direct and significant impact on capital adequacy and risk-bearing capacity, making it a fundamental financial tool rather than just a marketing strategy.

Takeaway: Retrocession is a strategic risk management tool that enables Singapore-based reinsurers to expand their capacity and stabilize their solvency by distributing peak risks globally.

Correct: In Singapore, the principle of indemnity in reinsurance is based on the concept that the reinsurer compensates the cedant for a loss for which the cedant was legally liable. An ex-gratia payment is made ‘out of grace’ and without legal obligation. Unless the reinsurance contract specifically contains an ‘ex-gratia’ clause or a very broad ‘follow the fortunes’ clause that explicitly includes non-legal settlements, a standard ‘follow the settlements’ clause does not compel a reinsurer to indemnify a payment that falls outside the legal scope of the underlying policy. The cedant must prove they were legally liable to the insured to satisfy the principle of indemnity.

Incorrect: The suggestion that a ‘follow the settlements’ clause provides an absolute right to recovery is incorrect because such clauses generally require the settlement to be within the terms and conditions of both the original policy and the reinsurance treaty. The claim that the Singapore Insurance Act mandates indemnity for all good-faith settlements is a misconception; the Act does not override the contractual requirement for legal liability in indemnity. The idea that a reinsurer can arbitrarily reduce a payment to 50% for shared commercial benefit has no basis in the legal principle of indemnity, which is concerned with actual legal loss rather than shared marketing interests.

Takeaway: Under the principle of indemnity in Singapore, a reinsurer is only liable to indemnify the cedant for losses the cedant was legally obligated to pay, unless the treaty explicitly covers ex-gratia settlements.