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in BUS 4027W - Actuarial Risk Management by

Hi. I am a little bit confused about the way the memo calculates the total reinsurance recovery for this question, particularly the part concerning the individual surplus arrangement. I am hoping if you can just expand on where they're getting the numbers from? (I'll highlight the portion I don't understand)


The question:


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The answer: 


image


My attempt:

My understanding is that the proportion retained under individual surplus is (retention limit)/(EML), which in this case I thought it would be 1mil/2mil = 50%. I am confused as to how they arrive at 16.67% ceded (83.33% retained). 


Thanks!

1 Answer

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by (810 points)
 
Best answer
Hi anonymous! :)

Very NB is to consider 1) they size of the policy (will indicate whether surplus reinsurance treaty will apply or not)... In this question, retention limit (per policy) is R1m. So, ONLY the only large policy will be impacted by the "Individual" surplus reinsurance treaty - the R2m policy.

The next very important point to note is the ORDER in which the reinsurance treaties operate. QS is first. This reduces the EML retained by the ceding insurer by 40%. So, for this large policy, only 60% of the EML is retained BEFORE the individual surplus, i.e. R1.2m... Then, our retention is R1m. So, we reinsure R200k of this R1.2m EML => 200k/1.2m = 16.67% :)

Remember that your EML after QS is reduced by the amount that you have transferred to the reinsurer through your QS treaty. 

Hope this helps and makes it clear! :)

Regards,

Pete
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