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How to calculate retention % for life assurance with an increasing sum assured.

+1 vote
asked Aug 30, 2016 in BUS 1003H - Introduction to Financial Risk by MKYMUT001 (320 points)

Example 15.8: 

A life insurance company has an individual surplus reinsurance agreement with retention limit R1000 000. It issues a life assurance policy to Marcio for the sum assured of R2000 000 increasing at a rate of 10% p.a. In the solution the sum assured of R2000 000 is used as the EML. My question is about whether the sum assured in this case really is the EML. I would have thought that if Marcio's age was mentioned in the question then the EML should be R2000 000 *(1.1)^(expected curtate future lifetime of a life aged x). (x being Marcio's current age). Is this idea correct?

1 Answer

+2 votes
answered Sep 7, 2016 by marciolopes (440 points)

From the line just above where the question was taken from (Page 330, Module 3):

“It is vital to remember that with individual surplus reinsurance contracts, the proportion retained by the direct writer gets set on the day that the policy is taken out and not when the claim is paid

Thus, the EML should be R2m, as this is the sum assured (and EML) when the policy is taken out with the reinsurer.