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SP8 September 2023 Question 6

M

Minh Ho

Very Active Member
One of the disadvantage of Surplus reinsurance is:
The insurer is not well protected against large claims from smaller projects.

Can you help me explain this?
As I know, the Surplus reinsurance estimate the Expected Maximum Loss of the risk.
Regardless of the project is small or big, the large claim can be expected from the "EML" therefore the statement seems not true.
Can you explain what's wrong with my thinking?
 
Surplus RI is a type of proportional RI. If the loss gets bigger the amount retained by the insurer and the amount ceded to the reinsurer increase proportionally.

Non-proportional RI such as XL will provide better protection to the insurer in relation to large losses.
 
Darren Michaels said:
Surplus RI is a type of proportional RI. If the loss gets bigger the amount retained by the insurer and the amount ceded to the reinsurer increase proportionally.

Non-proportional RI such as XL will provide better protection to the insurer in relation to large losses.
Click to expand...
XL only cover from the entry point to the exit point.
Outside of the exit point, large loss is no longer being covered.
For me, Surplus doesn't have that disadvantage in term of large loss.
 
You make a valid point that a claim can exceed the upper limit, that's why insurers buy layers of XL. Eventually, the insurer will have to make a judgement as to what limits it wants to buy, balancing the cost against its risk appetite.

Nevertheless Darren's point remains - XL can cap large losses (provided you buy layers that are high enough) whereas surplus reinsurance can't.
 
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