Ch4 - Excess of Loss

[Alan2007]

On Page 30 of Chapter 4 of the latest study notes reads

"Risk XL should protect an insurer adequately against losses that affect only one insured risk"

Is the above trying to say for example:
If there is a large claim say £40000 payable to the insured risk which is the insured policy and we there is a £50000 in excess of £4000 then the reinsurer would pay £46000 (£50000-£4000) and the cedant pays £4000.

If we have a total claim £60000 consisting of £23000 and £37000 on different days which relates to the same policy insured then the reinsurer would pay out in total £56000 and the cedant pay out £4000

Thanks

 

[interested]

I think that all this is trying to say is that Risk XL can protect an insurer very well against an event that causes a very large claim against only one policy. But it wouldn't help if there was an event (or several events) that caused lots of claims within the book of business, where these claims were large but not quite large enough to breach a Risk XL limit.