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.
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?
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.
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.
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 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.
Page 18 is all about 'stacked' limits, which is something very different, and if I remember correctly, has not been examined to date.
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?
See my post above yours. I don't think this question is about stacked limits as described on page 18.
