A general insurance company A writes only commercial property business. One risk which it coinsures with three other insurers B, C and D has a sum insured of $10m, but an expected maximum loss (EML) of $500,000. Company A accepts 40% of this risk, with B, C and D accepting 20% each.
Company A reinsures with company X 5% of every risk under a quota share treaty. It is agreed that A will not write business for which its gross share of the EML exceeds $250,000.
Company A also has a three line surplus treaty with companies Y and Z, each taking 50%, which operates after the quota share, and is based on company X taking 5% of company A’s gross business. The surplus treaty has a maximum retention of $50,000.
A single large claim gives rise to a loss of $750,000. (i)
(ii)
Calculate the amount of the claim which Company A will pay, net of all reinsurance recoveries due. State any assumptions you make.
[4]
Explain how your answer to (i) would differ if, immediately prior to this claim, companies B and Y were declared insolvent.
[3]
-------------------------
1. What is the meaning of the bold line? I don't see in the Solution anything related to the gross share of EML exceed $250000?
2. Also, does claim recoveries based on EML, not loss itself? (EML = 500k while loss = 750k, and all the calculation is based on EML)
Last edited: Aug 18, 2023
