Surplus Reinsurance

[calibre2001]

Hi there,

I don't quite get the surplus reinsurance examples given in the April 2005
CA12 Q1 question.

Surplus. Assume retention limit £100,000 and reinsurer s maximum cover
£400,000
For sum insured £65,000, reinsured pays £65,000, reinsurer pays nothing.
For sum insured £120,000 reinsured pays £100,000, reinsurer pays £20,000
If the claim is only £60,000, reinsured pays £50,000, reinsurer pays £10,000
For sum insured £550,000 reinsured pays £150,000, reinsurer pays £400,000

I don't get the bolded example? What's the difference between sum insured
and claim? Aren't they the same? And how was the answer derived?

Another thing is Acted's answer to the same question in the Revision booklet.
It uses the method of getting the ratio of retention level to the max cover
level and then applying it to individual claims to obtain the retained and
ceded levels? Why the different method from the one above?

By the way , are we expected to have such deep knowledge of surplus reinsurance? Thanks!

 

[didster]

Examiners solution doesn't explain the concepts very well, since its only worth say 2 marks. But unless you understood the concept you wouldnt be able to put numbers down. Since it is only an example to demonstrate understanding you could have used other examples.

With life insurance, the sum assured and claim are the same since you can't die halfway.
With General insurance, the claim could be less than the sum assured. Eg, if you insure a car for £10,000 and you damage a window which costs say £500 to repair, the claim will only be for the £500 (ignoring any excess etc).

I'll try to add the underlying explanation to the middle 2 numbers.

Key numbers are:
Sum assured = 120,000
Retention limit = 100,000 (this is the amount you keep yourself)

From which you can deduce that you are keeping 83 1/3% (100/120) and reinsuring 16 2/3%.
And it works just like quota share from now on. Only thing different with surplus is that you have a different % retained (which is calculated for each policy based on sum assured and retention limit)

If claim is full sum assured, you pay 83.3% or £100,000 and reinsurer pays £20,000;

If claim is only £60,000, you still pay 83.3%, ie 50,000 and reinsurer pays 16.7%, ie 10,000.

First one is under retention limit so don't bother with reinsurance.
Last one if done as above will result in payment above maximum cover, so it's capped at maximum cover.

 

[calibre2001]

Thanks!

 

[CramerRao]

Apologies for dragging this thread back up again but is it correct in saying that the retention limit for surplus reinsurance applies to the sum insured as opposed to the claim amount? - and then for excess of loss the retention limit applies to the claim amount?

 

[Charlie]

Yes.

For surplus, we use the retention limit and the sum insured (or estimated maximum loss if there is no sum insured) to calculate a %. We then ignore the retention limit and apply the % to the claim amount.

For excess of loss, we don't need to calculate a %, so we apply the retention limit directly to the claim amount.

 

[CramerRao]

Yes.

For surplus, we use the retention limit and the sum insured (or estimated maximum loss if there is no sum insured) to calculate a %. We then ignore the retention limit and apply the % to the claim amount.

For excess of loss, we don't need to calculate a %, so we apply the retention limit directly to the claim amount.

That's great, thanks for reply!