Hi The question asks us to calculate the insurer and reinsurers' share of different claim sizes according to its cessions. If the claim amount is greater than its PML, is it normal that the reinsurers and insurers bear share the claim amount? Or, is the error (difference) borne by the insurer alone? Thanks.
Hi Jensen, Once the risk has been taken on and the percentage to be ceded has been agreed, then the reinsurer is obliged to pay that percentage no matter what the claim size is. If a claim is greater than the EML, that's just tough. However, the reinsurer is likely to be pretty dissatisfied if many claims are greater than their respective EML's and are likely to want to renegotiate the terms of the arrangement the following year. Kind regards, Katherine.
Thanks Katherine I may be talking about something else now but so a PML error cover protects thecedant from PML errors, for the portion they retain?
Hi Jensen, "PML error cover" is not a commonly used term. Are you talking about a "PML miscalculation clause"? Surplus treaties in some jurisdictions (eg Germany) will often have this clause. It reduces the reinsurer's liability where claims exceed the PML. A typical wording might be: "The reinsurer’s indemnity in excess of the amount of the PML shall be limited to 50% of the amount that would have been payable if the underlying PML had not been exceeded." Alternatively, do you mean EML bust insurance? I've given my understanding of this below, although someone else might have a different view. This is a high layer excess of loss cover which protects the direct writer against multiple claims from a single event (the EML / PML will be estimated based on a single claim scenario, so aggregate cover will be needed). Actually, I think it also applies to risk XL (to prevent disputes if the EML was too low compared to the sum insured). It is often purchased at a group level. For example, I have seen it described in one set of published accounts as "Group-wide EML bust catastrophe XOL". Note how the terms EML and PML are used interchangeably in the discussion above. A source of possible confusion! Kind regards, Katherine.
Hi Katherine Thanks for the detailed explanation! I was actually refering to the PML bust cover, but good to know about the other clause Hope these won't come out in the exams!
