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Subject 303 September 2001

A

Actu09

Member
Hello out there!

I was a bit confused with the order of the operation of the reinsurance treaties..Could someone enlighten me how the allocation of the relevant losses between insurer B and C took place (regarding the surplus treaty participation weights)

Kind Regards,
 
First calculate what each party pays if a claim of size EML 10m occurs:

A pays 5m (the full XL layer), leaving 5m net of XL. The number of lines ceded to B is (EML net of XL - retention)/retention. We're told C always cedes the minimum through the surplus treaty - so that's the maximum retention 3m. So we have (5-3)/3=0.67 lines. This means claims are ceded in the ratio 1:0.67. Equivalently, think of this as saying that B pays 0.67/(1+0.67) =40% of every claim.

Now calculate recoveries for a claim of 9m:

A pays 5m, leaving 4m net of XL. B pays 40% of the 4m, ie 1.6m. C pays everything else, ie 2.4m.
 
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