Q3(ii) in Sept 2010 paper

[BMJKS]

I had a query in Sept 2010 paper, Q3 (ii).

In the question, while calculating Yellow Plastics' RI recovery, I got the £3.6m from Quota share. For RI recovery of the remaining £8.4m, I did deduct the £2.5m retention and the £2.5m aggregate deductible. As per me, after deduction of the aggregate deductible, £2.5m should have been recovered from the first XL layer and 80% of 0.9m from the second layer.

However, the specimen solution mentions the entire £3.4m will go to the second layer and the XL recovery is 80% of 3.4m.

Please advise why the recovery does not happen in the first layer after the aggregate deductible has been used up?


Thanks & regards,
BMJKS

 

[CAKABOGU23]

Hey,

How I understand reinsurance to work is that your claim goes to the topmost layer first and then finally comes down to the first layer (ironical in a way). Since layers do not overlap, there will always be something in the first layer if the claim was large enough to hit higher layers.
If this is not the case i.e. if the insurer passes the claim to the first layer first, then it could happen that the second layer will not pay anything and the insurer is left with a higher amount. For example, layer 1 is 500k XS 500k and; layer 2 is 1m XS of 1m (notice that the limit of layer 1 is the starting point of layer 2 so no overlap). If the insurer had a claim of 1.14m:

Claim goes to layer 1 first so insurer left with 0.64m which is not large enough to go to layer 2;
But if claim goes to layer 2 first, then layer 2 pays .14m, leaving insurer with 1m which is large enough to hit layer 1 and the insurer ends up with .5m

You can use similar reasoning for the question: 8.4m hits layer 2 first, leaving insurer with 5m.

But my own question is: Is it 5m or 5.68m that hits the first layer?

 

[BMJKS]

Hi,

I do not think that the claim would hit the higher layer first. It is to do with the aggregate deductible in the first layer.

I wasn't sure if the max amount that could go to the layer is up to the aggregate deductible.... which I now know it is. Since the max is used to against the aggregate deductible, the balance amount goes to the higher layer, i.e. 3.4m.

 

[Darren Michaels]

BMJKS is correct the claim hits the lower layer (2.5m xs 2.5m) first and then the higher layer (15m xs 5m) provided it is larger than 5m.

You correctly state that after the QS there is 8.4m of loss remaining and 2.5m of this falls within the retention of the XL programme. Without an aggregate deductible in place 2.5m would be recovered from the first layer and 3.4m from the second layer.

However the aggregate deductible must be fully eroded before any recoveries can be made from the first layer. So instead of recovering 2.5m from the first layer, the yellow plastics loss instead uses up the aggregate deductible and nothing is recovered from the first layer in respect of this loss. (nb You can't apply the first layer to the same loss again after it uses up the aggregate deductible, which is what you were trying to do originally)

 

[BMJKS]

Thank you Darren!

 

[Terran85]

Hi all,

I am still struggling with how they get the recovery from XL layer 2 of 2.72. Even after the 2.5 Agg deductible the claim is 8.4 - 2.5 = 5.9, so part of this should still fall within layer 2.5 x 2.5 ?

Then the next claim "Smith Flood", it recovers 1.75m from XL layer 1 ? How i see it is that

Gross loss = 8.5
50% QS recovery= 4.25
Net of QS recovery = 8 - 4.25 = 4.25
2008 XL layer 1 = 3 x 2
XL layer 1 recovery = 4.25 - 2 = 2.25

So i am unsure how to come to this 1.75.

Any help would be great!

Thanks

 

[Hemant Rupani]

2008 XL layer 1 = 3 x 2
XL layer 1 recovery = 4.25 - 2 = 2.25

The solution assumes 'Assume fire event occurred in 2009 as fire claims are generally notified quickly'
so you'd consider layer 2.5 xs 2.5 and see aggregate deduction is already used for Yellow Plastic's loss.