Canadian Accredited Insurance Broker (CAIB) Two Practice Exam

Why might an insurer choose to use a subscription policy?

1. The risk is too low to require additional coverage

2. Limits exceed the insurer's net retention limits

3. The insurer is unsure about the risk’s profitability

4. The risk will automatically renew each year

The correct answer is: Limits exceed the insurer's net retention limits

An insurer may opt for a subscription policy primarily when the limits exceed their net retention capacity. This type of policy allows multiple insurers to collectively underwrite a single risk, effectively sharing the exposure among several parties. By doing so, insurers can manage their risk exposure more effectively, relieving any single insurer from bearing the full financial burden of a large claim that could arise from high-limit policies. In scenarios where a risk's value is significantly high, an individual insurer might lack the financial resources or risk appetite to cover it fully on their own. Through a subscription policy, they can participate to a certain extent while transferring part of the risk to other insurers, thus ensuring they remain solvent even if an unexpected loss occurs. The other options do not pertain to the main reason for implementing a subscription policy. Factors like low risk or renewal terms are generally less relevant to the decision-making process regarding the structure of the policy.