J
joy
Member
Please, how were the values for 'top of ceded cover','effective retention' and 'effective RI top' calculated for each band as shown in the model solution.
Thank you.
Thank you.
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See attached file.
J
joy
Member
Thank you very much Katherine. I now understand it perfectly.
I
indexo
Member
Hi,
I always thought the excess of reinsurance of 5m should apply to insurer, i.e. this is on top of original excess.
For example in band B, the reinsurance excess / retention level should be at 1+5m = 6m, but seems like I am wrong.
Can you please clarify on this?
I always thought the excess of reinsurance of 5m should apply to insurer, i.e. this is on top of original excess.
For example in band B, the reinsurance excess / retention level should be at 1+5m = 6m, but seems like I am wrong.
Can you please clarify on this?
This builds on material covered in Chapters 15 and 20. The formulae are a bit messy to put on the forums, and unfortunately the attachment above doesn't work any more. But if you see ASET, a full explanation is included there.
I
indexo
Member
Hi,
When you said it involves formulae, is there any page that you can lead me to in the core reading to answer my questions above?
I understand how the answers were derived actually, it is just I don't get why the reinsurance excess starts from 0, and not above the original excess.
When you said it involves formulae, is there any page that you can lead me to in the core reading to answer my questions above?
I understand how the answers were derived actually, it is just I don't get why the reinsurance excess starts from 0, and not above the original excess.
See Page 11 and 12 of Chapter 20.
I think maybe you're confusing the layers in the question for the cedant (Bands A-D) with the reinsurance layer (10 xs 5)?
So, for example, Band A policies (for the cedant) won't get any recoveries at all from the reinsurance layer.
For Band B, you use the ILF curve to work out the recovery as a proportion of the expected loss to the band. This will be ILF(9+1)-ILF(5) on the top, and ILF(9+1)-ILF(1) on the bottom. Notice that the values in the numerator have to be adjusted as the reinsurance layer goes outside the cedant's layer.
This gives 32%. You then multiply this by the losses to the band, ie 14k times 45%.
I think maybe you're confusing the layers in the question for the cedant (Bands A-D) with the reinsurance layer (10 xs 5)?
So, for example, Band A policies (for the cedant) won't get any recoveries at all from the reinsurance layer.
For Band B, you use the ILF curve to work out the recovery as a proportion of the expected loss to the band. This will be ILF(9+1)-ILF(5) on the top, and ILF(9+1)-ILF(1) on the bottom. Notice that the values in the numerator have to be adjusted as the reinsurance layer goes outside the cedant's layer.
This gives 32%. You then multiply this by the losses to the band, ie 14k times 45%.
I
indexo
Member
I think I confused this question with page 18 of Chapter 15 first paragraph, where the range of reinsurance starts after the 'cedant' pays the excess amount. Any further explanation on this will be very helpful!
Thanks.
Thanks.
Page 18 is all about 'stacked' limits, which is something very different, and if I remember correctly, has not been examined to date.
I
indexo
Member
In page 18, it says if the underlying contract is 1.4m xs 100k and reinsurance is 500k xs 500k, the reinsurance will cover range [600k, 1.1m]. I understood this as because the reinsurance excess of 500k needs to be covered by cedant, on top of the cedant's 100k original excess.
I applied this to the question in this paper, hence for band B, cedant's contract is 9m xs 1m, and reinsurance is 10m xs 5m, so my understanding was that the reinsurance will cover range [6m, 10m] and so I used ILF(10)-ILD(6) for the top part.
What went wrong with my understanding here?
I applied this to the question in this paper, hence for band B, cedant's contract is 9m xs 1m, and reinsurance is 10m xs 5m, so my understanding was that the reinsurance will cover range [6m, 10m] and so I used ILF(10)-ILD(6) for the top part.
What went wrong with my understanding here?
See my post above yours. I don't think this question is about stacked limits as described on page 18.
Dharvish Ghumondee
Made first post
Can you please reshare the attachment? I am unable to open it.
Unfortunately the attachment doesn't open as it was removed when we updated the forum software a few years ago. Katherine is away at the moment so I can't access the file she uploaded, but when she returns I'll ask her to have a look for it. Alternatively, you can see the full solution in The Vault if you have that?
See attached file.
Hi, I got caught out by this question too, for the same reason. Somewhere in the course notes it was implied that if you have a 10xs5 reinsurance contract that means it covers the insurer's losses from 5m to 15m. However in this question, 10xs5 reinsurance cover means the reinsurer covers the original insured's losses in the range 5m to 15m.
Suppose the original insured has an excess of 1 and that a claim comes in for 6m.
The original loss is 6m, but the loss to the insurer is only 5m.
Under the first interpretation, we would get a recovery of 1m. Under the second interpretation we get a reinsurance recovery of 0.
So is the convention that reinsurance limits and attachments are applied to the original loss, not the insurer's loss?
Or, in other words, does a reinsurer measure the insurer's loss gross of the original excess for the purpose of determining a recovery?
Suppose the original insured has an excess of 1 and that a claim comes in for 6m.
The original loss is 6m, but the loss to the insurer is only 5m.
Under the first interpretation, we would get a recovery of 1m. Under the second interpretation we get a reinsurance recovery of 0.
So is the convention that reinsurance limits and attachments are applied to the original loss, not the insurer's loss?
Or, in other words, does a reinsurer measure the insurer's loss gross of the original excess for the purpose of determining a recovery?
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I think the reinsurance market is not as black and white as that Jack. It is a many-headed beast and it depends on the individual wording.
(For example, World Trade Centre losses weren't settled for a long time, as cedants and reinsurers argued about whether it constituted one loss or two, ie one event or two towers. In the end, some reinsurers settled it as one loss, others as two, depending on how the courts ruled the contract wordings should be interpreted. So you see, there's no 'one size fits all' answer to your question.)
(For example, World Trade Centre losses weren't settled for a long time, as cedants and reinsurers argued about whether it constituted one loss or two, ie one event or two towers. In the end, some reinsurers settled it as one loss, others as two, depending on how the courts ruled the contract wordings should be interpreted. So you see, there's no 'one size fits all' answer to your question.)
So how do we assess in the exam which approach to take? The chapter on exposure curves states that if you purchase a reinsurance contract with excess D and L and your underlying contract has original excess d and limit l, then the cost to the layer is C * (G((L + D + d)/(M+d)) - G((D+d)/(M+d)), where C is the ground up loss.
This implies that the reinsurer covers the layer from D+d to L+D+d.
By contrast, in Chapter 20 on Reinsurance Pricing, the ILF formula implies that the reinsurer covers D to L+D. This is approach used in the question above.
In an exam setting how do we know which convention to use?
This implies that the reinsurer covers the layer from D+d to L+D+d.
By contrast, in Chapter 20 on Reinsurance Pricing, the ILF formula implies that the reinsurer covers D to L+D. This is approach used in the question above.
In an exam setting how do we know which convention to use?
In practice it would depend on the contract wording as to whether it applied to the FGU loss or not. Hopefully in the exam the wording of the question will be clear enough to give you a good guide. If in doubt however, make sure to write down your assumptions and you should pick up some of your follow-on marks.