September 2010 Question 3 Aggregate Deductible (ii) Yellow Plastic

[Batsirai Kapembeza]

Hello, I'm having a hard time understanding why the aggregate deductible was not affected by the 3.2 million claim under the calculation involving the reinsurance recovery for Yellow Plastics.In particular the past paper solution says

"We know that the aggregate retention has not yet
been used by another claim as the next largest claim is £3.2m and after quota
share reinsurance this would not be large enough to hit the £2.5m xs £2.5m
layer"
I don't understand this part.

In the exam paper solutions the aggregate deductible is still left at 2.5 million when calculating the reinsurance recoveries for Yellow paints.I would have thought this amount would have reduced because of the other 3.2 million claim relating to a fire event in January 2009. Why is this event not affecting the aggregate deductible?

 

[Darren Michaels]

You need to allow for QS recoveries on the £3.2 million loss. The QS cession is either 50% or 30% depending on when the underlying policy incepted. This means that after QS recoveries the loss is either £1.6m or £2.24m, which means that it is too small to impact the first layer of XoL which has an attachment point of £2.5m. Hence, the aggregate deductible is not impacted by this loss.

 

[Qayanaat]

Hi,

Can you please help me understand why there is no recovery on layer 1 for the 2nd claim (Yellow)?
Here are my thoughts, please let me know where I'm going wrong:

Yellow:

• 30% * 12.0m = 3.6m
• 12m - 3.6m = 8.4m > attachment point
• First 2.5m retained by insurer (as we have 2.5m xs 2.5m)
• 8.4m - 2.5m = 5.9m
• Insurer also has to pay 2.5m aggregate deductible.
• 5.9m - 2.5m = 3.4m
• Layer 1 covers a max of 2.5m, hence can only recover 2.5m from layer 1.
• Layer 2 covers the remaining 0.9m
• Therefore total recovery from reinsurer = 3.6m (from QS) + 2.5m (from layer 1) + 0.9m (from layer 2) = 7.0m

Thank you.

 

[Ian Senator]

The agg deductible wipes out the recovery on layer 1. So move your fifth bullet point above up to bullet point 3.
8.4 hits YP after the QS. Use up the 2.5 AAD, so recover nothing from layer 1. Recovery under layer 2 is 80% of 3.4. So total recovery is 6.32, total retained is 5.68.

 

[Qayanaat]

Ah ok I understand, thanks Ian.

 

[VishalKumar]

The agg deductible wipes out the recovery on layer 1. So move your fifth bullet point above up to bullet point 3.
8.4 hits YP after the QS. Use up the 2.5 AAD, so recover nothing from layer 1. Recovery under layer 2 is 80% of 3.4. So total recovery is 6.32, total retained is 5.68.

Hi, after QS recovery 8.4 m remains. AAD of 2.5 m and 2.5 XS 2.5 will have 3.4 remaining, out of which 2.5 m could be recovered from layer 1 and 80% of 0.9 which is 0.72 from layer 2? Am I missing something.

 

[Darren Michaels]

The 8.4m after QS is correct. The first 2.5 falls below layer 1, the next 2.5 would have been recovered from layer 1 if there was no aggregate deductible, so that all erodes the aggregate deducible instead. That leaves 3.4m to go to layer 2 but it is only 80% placed so recovery from layer 2 is 2.72m.

 

[VishalKumar]

Sorry, could you pls explain more on "the next 2.5 would have been recovered from layer 1 if there was no aggregate deductible, so that all erodes the aggregate deducible instead. "?

If 8.4 is reduced by 2.5m (on insurers book) due to aggregate deduction(AD) , that means there is no further AD remains. So for balance 5.9 m we should see the XOL layer 1 only (2.5 Xs 2.5) and further to layer 2 if something remains after exhausting layer 1?

 

[Darren Michaels]

Don’t forget the first 2.5m falls below layer 1 which is 2.5m xs 2.5m. The next 2.5m would have been recovered from layer 1 if there wasn’t an aggregate deductible, but instead erodes the aggregate deductible of 2.5m.