303 Surplus Reinsurance Help

Discussion in 'ST3' started by TROURKE, Apr 5, 2007.

  1. TROURKE

    TROURKE Member

    Hi,

    Could anyone help me on question 5, Sep 2001 303 paper.

    I am having problems in relating the answer to the notes!!

    For example, the notes use the formula (E-r)/r to determine the number of lines to use. So ($5m-$3m)/$3m = 2/3. This is not correct.

    Or should it be:-
    E = (1+N)R. $5 = (1+4)R hence R = $1m i.e a line has the width of $1m. The company wants to retain the maximum amount, namely $3m and hence 3 lines are required to do this. The other lines are ceded to the reinsurer i.e. 2 lines.

    If anyone could clarify that would be great. I thought that I understood surplus reinsurance but this questions has stumped me a bit.
     
    Last edited by a moderator: Apr 5, 2007
    TROURKE, Apr 5, 2007
    #1
  2. Ian Senator

    Ian Senator ActEd Tutor Staff Member

    2/3 of a line is correct. Why shouldn't it be? Lines can be non-integral.

    EML is 10m.
    XL picks up 5m, leaving 5m.
    Minimum cede=max retention, so keep 3m and cede 2m (2/3 of a line).
    Then all claims net of the XL are shared 2:3 between B:C.
     
    Ian Senator, Apr 5, 2007
    #2
  3. ochiltree

    ochiltree Member

    Surplus Reinsurance

    Hi,

    Another question on surplus reinsurance .....

    The notes say that reinsurers may require the direct writer to retain all risks that fall below the minimum retention. Later, it says that all claims for the particular risk will be shared between the direct writer and the reinsurer in the proportion 1:k, irrespective of the size of the claim.

    I'm not clear on what happens with claims that are below the minimum retention. Are they split in the 1:k proportion, or, does the direct writer meet the entire cost?

    Thanks.
     
    ochiltree, Apr 5, 2007
    #3
  4. TROURKE

    TROURKE Member

    Thanks - one last thing

    Ian thank you very much. My other approach that I mentioned where each line has a width of $1m rather than $3m. Is that a correct answer also?
     
    TROURKE, Apr 5, 2007
    #4
  5. Ian Senator

    Ian Senator ActEd Tutor Staff Member

    Trourke: I can't follow your 'other' approach, but it doesn't look right. If it's retaining the max amount, how come it's only choosing a retention of 1m? And how come you're mentioning 3 lines but using N=4?

    E=R(1+n) where n is the number of lines ceded and R is the retention.

    Ochiltree: If there's a minimum retention specified in the treaty, then small risks will be retained wholly by the insurer and the reinsurer has no liability for claims arising on these risks, whereas larger claims will fall within the scope of the treaty and therefore be split into the proportion 1:n where n is the number of lines.

    Hope this helps!
     
    Ian Senator, Apr 5, 2007
    #5
  6. ochiltree

    ochiltree Member

    Excellent, thanks a lot for the info.

    So does this mean that all claims aren't split in the 1:n proportion where n is the number of lines, like the core reading at the top of page 22, chapter 4 says? Perhaps it should read "all claims above the minimum retention will be split in the proportion...". I know that the core reading on page 21 does say that the insurer will retain all risks that fall below the minimum retention, but I was getting confused with what is said at the top of page 22.
     
    Last edited by a moderator: Apr 5, 2007
    ochiltree, Apr 5, 2007
    #6
  7. Ian Senator

    Ian Senator ActEd Tutor Staff Member

    I think you've misunderstood this bit of Core Reading. The top of page 22 is saying that if a risk is ceded to the treaty (following on from the bottom of page 21) then ALL claims no matter what their size are indeed split into the proportions 1:n.

    The only time a claim won't be split into any proportions is if it isn't ceded to the treaty at all, for example if it's a very small risk that the treaty won't accept (due to a minimum retention) or if the insurer just decides to keep it all himself.
     
    Ian Senator, Apr 5, 2007
    #7
  8. ochiltree

    ochiltree Member

    Ah ha.

    Thanks for answering so quickly, cheers!

    You're bang on, I did misunderstand the core reading. I see what it means now that you have explained it, so thanks for putting that straight in my head. Now for the rest of the course ;)
     
    ochiltree, Apr 5, 2007
    #8

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