Chartered Property Casualty Underwriter (CPCU) 540 Practice Exam

Ceding commissions paid by the reinsurer to cover acquisition expenses help manage capital by providing what?

Surplus relief Higher investment returns Lower taxes Regulatory relief

Correct Answer:

Surplus relief

Explanation:

The main idea is that ceding commissions help a cedent manage capital by increasing surplus. When a reinsurer pays ceding commissions to cover acquisition expenses, those funds effectively reimburse the cedent for costs incurred to obtain business. That reimbursement reduces the net cost of reinsurance and adds resources to the cedent’s statutory surplus, giving the company more capital to support ongoing underwriting and regulatory requirements. This immediate boost to surplus is why it’s described as surplus relief. The other options don’t fit: higher investment returns, lower taxes, or regulatory relief aren’t direct effects of these commissions.

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