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Chapter 20 Q20.3 (i)

S

sma09gc

Member
Hi,

For Ch20 (i) I don’t quite understand how the recoveries/net numbers are being calculated. Looking at the solution I have 2 questions:

- why do we reduce for the 20% quota share twice? Why doesn’t the XoL just act on the GCI net of QS number?

- how is the XoL part calculated? I’m the example for Year 5 NCI, I don’t understand where the 850 comes from in the formula: 80% x 98667 - (80% x 850 - 500) = 78754.

Any help would be greatly appreciated. Thanks.
 
Hi sa09gc,

We're given a risk XL, which means it operates on individual losses. Hence we can't just feed the "claims incurred net of QS" through the XL (because that would consist of lots of claims all in one pot).

Instead, the question:
  • first calculates the claims incurred net of QS (which in Year 5 is 80%*98,667=78,934)
  • and then deducts the recoveries from the large losses given in the second table (in Year 5 there is only one loss to hit the XL layer, and it's shown in the last row of the second table, 850)...
    • So first net down this single loss for the QS: 850*80%=680
    • then feed it through the XL: 680-500=180.
  • Hence, the NCI is 78934-180=78,754
Of course, this assumes that the large losses are NOT included in the underwriting statistics shown in the first table, which is why you were confused.

Best wishes,

Katherine.
 
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