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