Hi everyone, I am not very clear on this issue of reinstatements. After the last reinstatement premium is paid for claim 5, why does the reinsurer still pay further claims? Also, why does the reinsurer pay only 2m for the last claim?
Eureka! So this is what I figured out. The cedant pays a reinstatement premium each time the coverage limit has been reduced, subject to two reinstatements. This reinstatement premium is prorated based on the amount of the claim (i.e. proportion of reinsurance recovery to limit amount). After the 5th claim, which exhausts the reinstatement option, the cedant has a 'lifeline' of only 4m left. The 6th claim reduces this by 2m. So that at the time of the 7th claim, the cedant can recover only 2m from the reinsurer, which is what the reinsurer pays.
Hi Everyone, A question just came to mind. What if Claim 5 was 2m (net of retained amount). What would the reinstatement premium be?
Help!!!!! Just when I thought I had understood this reinstatement stuff. Question 5.14 - why is there a reinstatement premium to be paid after the 2nd claim when the treaty allows for only one reinstatement? Is it that the whole reinstatement premium needs to be paid? The recoverable amount for claim 2 burns through the whole layer, so why is the insurer not paying the full reinstatement premium?
Hi there Firstly your understanding of how reinstatement premiums work in your post of 21 Oct (945pm) is totally correct. To answer you next query - what if claim 5 were £2m instead: The reinstatement premium would still be £0.3m as the same amount of cover (£0.8m) would be reinstated. However, an additional £0.2m would be recovered (from the final reinstated coverage) and so when we get to claim 7 only £1.8m would be available to be recovered. Moving on to Question 5.14 from the notes. The first claim ($2m) does not use up all of the original cover (it only uses $1m of the $1.5m available) and hence the reinstatement premium due is only $280k. The second claim uses the remaining $0.5m of the initial coverage plus $1m of reinstated coverage, and the remaining $140k of reinstatement premium is due to reinstate the initial coverage which is used by this loss. The full reinstatement premium is paid, but in two parts, two-thirds when the first loss is recovered and one-third when the second loss is recovered.
