Hmm... Looks like a ridiculously easy question, but would you mind giving me an example on how to do it please? Cheers,
Hi Tommo, I'll go through Risk 1 for you and then you can have a go at the others to make sure you're happy. Here there is a maximum retention of £80,000 (ie anything from 1 to 80,000 is allowed) and a maximum of 8 lines (can use anything up to 8). This gives flexibility to the cedant, which is one of the advantages of using surplus reinsurance. The range of possible amounts will follow from the choice of retention and lines, within the parameters specified - so we can choose to retain as much as possible or as little as possible. With surplus questions, we always start by calculating the proportions retained and ceded. We always do this before we even consider the claim amounts. The EML for Risk 1 is £240,000 a) If we were to retain the maximum £80,000 then we would pass £160,000 of the EML over to the reinsurer. This represents 2 lines (of £80,000 each). So all claims would be split in the proportions of 1/3 (retained) to 2/3 (ceded). Now we can consider the claim, which is £12,000. This will be split in the proportions calculated - so we retain £12,000/3 = £4,000 and cede £12,000x2/3 = £8,000. b) If, instead, we wanted to retain the minimum, then we can achieve this by using the maximum of 8 lines. So there are 9 equal parts this time (8 lines plus the retention). This means that all claims will be split in the proportion 1/9 (retained) to 8/9 (ceded). The £12,000 claim will now be split in these proportions. So we retain £12,000/9 = £1,333.33 and cede £12,000x8/9 = £10,666.67. I hope that helps, Coralie
