Chapter 23 - Reinsurance

Discussion in 'SP2' started by fischer, Jun 27, 2008.

  1. fischer

    fischer Member

    Q1. Explain how the Excess of loss reinsurance premium is calculated with the help of a numerical example, under non-proportional and individual surplus methods.

    Q2. Premium paid to reinsurer (at start of year t) under the risk-premium reinsurance method is calculated as
    RP(t) = q(x+t).B(t)
    where B(t) is the reinsured amount and B(t) is (suppose) the excess of "benefit payable" over the "reserves".

    My (rather silly) question is - are these benefits payable and reserves as at time t or ar they the expected benefits ad reserves at t+1.
    May be a numerical example would help, if possible.
     
    fischer, Jun 27, 2008
    #1
  2. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    1. Excess of loss reinsurance is non-proportional. Individual surplus and quota share only apply to proportional reinsurance.

    To price excess of loss reinsurance you would need to estimate a probability distribution for the size of the total claims. A very simple numerical example follows for catastrophe reinsurance.

    Consider an insurer with retention of 5 million. The reinsurer models the probability of a catastrophe as follows. Total claims of 20 million with probability 5%, total claims of 10 million with probability 10%, total claims less than 5 million with probaility 85%. The reinsurance premium would then be the expected cost of (20-5)x0.05 + (10-5)x0.1 = 1.25 million.

    2. In your example, the reinsurer will pay the claim at time t+1, so it will be interested in the benefits less reserves at time t+1.

    Best wishes

    Mark
     
    Mark Willder, Jun 30, 2008
    #2
  3. fischer

    fischer Member

    Thank you.

    So, am I right in saying that under the risk premium reinsurance the, premium paid by the cedant to the reinsurer (at time t) will be dependent on the expected sum-at-risk (at time t+1, calculated at time t) but not on the actual sum-at-risk (at time t+1)? i.e. the premium paid will be the same irrespective of what the actual sum-at-risk turns out to be?
     
    Last edited by a moderator: Jul 1, 2008
    fischer, Jun 30, 2008
    #3

Share This Page