Surplus reinsurance

[Damo123]

Can somebody please explain surplus reinsurance? A numerical example would be good?

Thanks

 

[tad29]

Surplus reinsurance for general insurers

OK, here's how it works in general insurance. (Perhaps someone else can fill you in on life.) A surplus treaty is a type of quota share treaty where the proportion of each risk ceded can be different. The treaty will specify:

L = number of "lines" (the meaning of this will become clear in the example)
r = minimum retention
R = maximum retention

When the insurer accepts a risk, it can decide what proportion of it to cede within certain limits. The amount of risk retained must be between r and R and the amount ceded must not be more than L times the amount retained. As a numerical example, suppose L=5, r=$1m and R=$20m. I wish to insure a property for which the estimated maximum loss (EML) is $60m. I could:

i) Retain the maximum, i.e. $20m and cede $40m. Since $40m is twice $20m this would mean I am using 2 of the 5 lines. In this case I would pay two thirds of premiums on this policy to the reinsurer and recover two thirds of any claims from the reinsurer since $40m is two thirds of $60m.

ii) Retain $10m and cede $50m. This would be using all of the 5 lines. In this case I would pay five sixths of premiums to the reinsurer and recover five sixths of any claims as $50m is five sixths of $60m.

iii) Retain something inbetween these two and cede the rest. In this case I would pay premiums and recover claims according to the proportion of the risk ceded.

Note, I can't retain only $1m since this would involve ceding $59m and there aren't 59 lines on the treaty.

I've given you all the detail you've asked for here but I doubt that you would be required to be able to reproduce all of this for a CA1 exam. Don't know for sure though.

Hope that helps.