I think this is how it is being done: the EML is way above the limits of the Surplus reinsurance. Lines available = 5, so maximum cover will be: (5+1)x R. R is the retention (800,000) this gives you 4,800,000 as the cover and the reinsurer's share is 4,800,000 - 800,000 = 4,000,000 hence the 40% ceding.
Thanks. I guess you are probably right. But this subtracting retention from the total reinsured rather than calculating a proportion to ceded makes it look more like excess of loss.. Not so happy with this question..
Yes Ryan11 is correct. It all depends on the precise wording of the reinsurance treaty as to whether you can cede risks with an EML greater than (1+L)xR to the surplus reinsurance treaty and cover the remaining amount (beyond the reinsurer's maximum number of lines) ourselves. Here R is the maximum retention and L the maximum number of lines. In this question the Examiners told you that both risks were covered by the surplus reinsurance treaty, so they were expecting you to assume that this was possible under the terms of the treaty.
