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Risk Transfer: The 10-10 rule

myID_+ priorDate_+ record_+ WET_+ fadeFactor_

Use the 10-10 rule to determine whether risk transfer has occurred. ($-values in millions) shout-out to Casey!

  current score:
0.000

NPV(loss) @ 90th percentile
110% of premium
RISK TRANSFER (y/n)
reinsurance premium paid at inception (millions) 3.5
years after inception to lump sum payment of losses 2
type of treaty: excess-of-loss
primary retention 8.0
excess coverage 5.0
discount rate 4.0%
P(loss) gross loss
0.90 16.0
0.95 25.0
0.99 63.0

10-10 rule

IF there is ≥10% chance of ≥10% U/W loss by the reinsurer THEN risk transfer has occurred. This is true when:


NPV(loss) @ 90th percentile > 110% x (reinsurance premium)

NPV(loss) @ 90th = PV( gross loss – retention )    ← shout-out to AT & Rev

TIP

Don't forget to check whether (gross loss) > (primary retention) + (excess coverage)


If it is then the gross loss must be capped at (primary retention) + (excess coverage)

Solution:
NPV(loss) @ 90th percentile 1.123
110% of premium 3.85
RISK TRANSFER (y/n) n