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Answer: David's statement about reinsurance.
## Explanation Let's analyze each statement: **A. John's statement about emerging market debt** - This is likely correct. Emerging markets debt typically carries higher credit risk due to factors like political instability, currency risk, and weaker legal frameworks. **B. David's statement about originating new policies** - This is likely correct. When insurance companies extend installment terms and grace periods to corporate customers, they are effectively extending credit, which creates credit risk exposure. **C. John's statement about reinsurance** - This is correct. Buying reinsurance does create credit risk exposure. If the reinsurer defaults or becomes unable to pay claims, the primary insurer faces credit risk. This is known as counterparty risk in reinsurance arrangements. **D. David's statement about reinsurance** - This is the most likely incorrect statement. David claims "Reinsurance does not create credit risk" and "Reinsurance helps us mitigate our risk exposure." While reinsurance does help mitigate underwriting risk, it absolutely creates credit risk exposure to the reinsurance counterparty. The primary insurer becomes exposed to the creditworthiness of the reinsurer. Therefore, David's assertion that reinsurance does not create credit risk is incorrect, making option D the best answer.
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Q-3. John is a risk manager for ABC, an insurance company. Below is a conversation between John and his colleague David about credit risk. John tells David, "ABC faces significant credit risk in our investment portfolio. We are taking on too much risk in emerging markets debt and need to find a way to hedge this risk." David responds, "I am more concerned about the credit risk we take on when originating new policies, in particular when we extend installment terms and grace periods to our corporate customers." John responds, "No, David, what we should worry about is our emerging market credit risk and the credit risk we are taking on from buying reinsurance." David responds, "Reinsurance? Reinsurance does not create credit risk. Reinsurance helps us mitigate our risk exposure." In the above conversation, each of the statements is likely true except which of the statements is most likely incorrect?
A
John's statement about emerging market debt.
B
David's statement about originating new policies.
C
John's statement about reinsurance.
D
David's statement about reinsurance.