Sep 09 Q4i

CORRECTION: SORRY, this paper is actually the April 2009 paper, not the September 2009 one!

This question is about excess of loss RI, with reinstatements. It gives you a list of claims and their incurred amounts, and asks you how much the reinsurer pays.

In the solution, a column is labelled 'reinsurer pays' and a second column with 'reinstatement premium'.

I understand the reinsurer pays column (except for the last claim, but i think this is to do with the reinstatements bit), and don't understand why the second reinstatement of £1.5m is actually paid as £1.2 m after claim 3, and £0.3m after claim 4.

So my questions are:
(1) why does the reinsurer only pay £12m (ie shouldn't the last claim amount be £4m, not £2m, since it is an aggregate deductible, not limit?)

(2) what is going on with the reinstatements column?

Any advice appreciated..
Thanks!

 

Hi there

The total recovery is capped at 12m, which is why the last claim recovery is only 2m. The layer has 2 reinstatements, so total cover is (2+1)*4m.

In this question the reinstatement prem is calc as 'prorata to amt' meaning it is paid as you recover from the layer.

The first reinstatemtn prem paid is the full 1.2m because you've used up the layer; ie 4/4*1.2*1m

Second reinstatment prem is 3.2/4*1.5*1m = 1.2m.

Make sense? Sorry I might have typos arouund as I am typing this from my blackberry.

 

Ah! I see. I was trying to subtract instead of divide, makes much more sense now.

Thanks!