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Chapter 20 Q20.3 (i)

Discussion in 'SP8' started by sma09gc, Aug 22, 2019.

  1. sma09gc

    sma09gc Member

    Hi,

    For Ch20 (i) I don’t quite understand how the recoveries/net numbers are being calculated. Looking at the solution I have 2 questions:

    - why do we reduce for the 20% quota share twice? Why doesn’t the XoL just act on the GCI net of QS number?

    - how is the XoL part calculated? I’m the example for Year 5 NCI, I don’t understand where the 850 comes from in the formula: 80% x 98667 - (80% x 850 - 500) = 78754.

    Any help would be greatly appreciated. Thanks.
     
    sma09gc, Aug 22, 2019
    #1
  2. Katherine Young

    Katherine Young ActEd Tutor Staff Member

    Hi sa09gc,

    We're given a risk XL, which means it operates on individual losses. Hence we can't just feed the "claims incurred net of QS" through the XL (because that would consist of lots of claims all in one pot).

    Instead, the question:
    • first calculates the claims incurred net of QS (which in Year 5 is 80%*98,667=78,934)
    • and then deducts the recoveries from the large losses given in the second table (in Year 5 there is only one loss to hit the XL layer, and it's shown in the last row of the second table, 850)...
      • So first net down this single loss for the QS: 850*80%=680
      • then feed it through the XL: 680-500=180.
    • Hence, the NCI is 78934-180=78,754
    Of course, this assumes that the large losses are NOT included in the underwriting statistics shown in the first table, which is why you were confused.

    Best wishes,

    Katherine.
     
    Katherine Young, Aug 22, 2019
    #2

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