CIC Insurance Company Operations Practice Test

In pro-rata reinsurance, the reinsurer receives only a fraction of the original premium based on the agreed-upon terms between the ceding company and the reinsurer. This arrangement is typically structured so that the reinsurer takes on a proportional share of the risk, which in turn means they also receive a corresponding proportion of the premium.

The key concept of pro-rata reinsurance is that the reinsurer participates directly in the premiums and losses, sharing them in accordance with the specified percentage. Consequently, the reinsurer doesn't receive the entire original premium; rather, they receive a percentage that reflects the risk they are assuming. This setup allows for both parties—ceding company and reinsurer—to maintain balance in their financial arrangements concerning risk exposure.

In other choices, receiving 100% of the premium without deductions is not reflective of how pro-rata reinsurance operates. Similarly, the mention of a total amount after deducting a ceding commission implies that there is a full premium payment involved, which contradicts the essence of pro-rata arrangements. Lastly, the idea that no payment is made to the ceding company is inaccurate, as the ceding company does receive a share of the premium and retains part of the revenue, even after transferring risk.