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April 02 paper 1 question 7

S

SYSW90

Member
Hi,

Could you go through an example on how to do part (ii) with one of the loss ratios for each quota share reinsurance treaty for 2000 and 2001. I tried to calculate the answer but I can't get the answer in the marking scheme and the scheme doesn't shall how to calculate it. I don think I fully understand how the quota share works even though it seems like a standard reinsurance policy.


Thanks.
 
It is a standard policy, but I find most people get confused by the percentages. Try your calcs again, but when you're calculating reinsurance commission, remember to calculate it as a percentage of what the reinsurer receives in premium, not as a percentage of what the cedant writes. I bet that's where you're going wrong.

If you still can't get it, let me know and I'll give you another hint!
 
For LR 65% in 2000:

Reins Prem=100*0.7=70M
Reins Comm=70M*0.29=20.3M
Reins Loss=70*0.65=45.5M
PC=70*(0.675-0.65)=1.75M
So Reins Profit=P-Comm-C-PC=2.45M

The original Profit=100M*(1-0.65-0.15-0.1)=10M
So the Cedant's Profit=10-2.45=7.55M.


Other scenario could follow the same kind of logic.
 
Last edited by a moderator:
Thanks Sherwin.

In the question, it also says there is a 29% reinsurance commission. Is that paid by the reinsurer to the insurer? Why does this not need to be included in the calculations?

Many thanks.
 
Yes, it's paid by the r/i to the cedant.
Sherwin just forgot to write it down, but there should be a 29%*70m also taken off. This still gives the right answer.
 
Ian Senator said:
Yes, it's paid by the r/i to the cedant.
Sherwin just forgot to write it down, but there should be a 29%*70m also taken off. This still gives the right answer.
Click to expand...

Yeah, rivised it. Wrote it on paper but got ignored when typing online :)
 
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