Sep 2010, q3 (ii)

[12345]

In this one, after the deduction of the XS and aggregate amounts, why doesn't £2.5m of the £3.4m apply to the first layer and the remainder to the second layer?

Thanks in advance

 

[Katherine Young]

I assume you are talking about the loss to Yellow Plastics.

Firstly, always bear in mind that the XL treaties stack on top of each other. If this isn't clear to you, better do some revision of Chapter 5 Question 5.12 before you read any further.

The net retention for Yellow Plastics, after QS recoveries is 8.4.

Therefore, if there were no aggregate deductible and if layer 2 were 100% placed, the recoveries would be:

2.5 from layer 1
3.4 from layer 2.

However, layer 2 is only 80% placed, so the recovery from layer 2 is only 3.4 x 80% = 2.72.

Also, an aggregate deductible of 2.5 is in place on layer 1. This works to reduce the coverage. So no recoveries are payable from layer 1 until the aggregate deductible is used up. So for this claim, the recovery would have been 2.5. This is instead eaten up by the aggregate deductible, and only claims after this will get recoveries.

 

[12345]

Thanks Katherine. I understand how it works just assumed (incorrectly!) that the aggregate deductible would be paid and the layer would remain open, forgetting how a deductible works!