Example 1 - Excess of Loss

In the example with the excess of loss treaty, it lists the aggregate deductible as $1M and aggregate limit as $2M. Does the aggregate treaty apply to the reinsurer? So when the reinsurer assumes a loss > $1M the remainder (up to $2M) would be ceded to another reinsurer? I'm a but confused because it doesn't specify. Thanks!

Comments

  • The treaty terms in the example apply to the primary and the reinsurer alone: there is no third party. Reinsurer assumes primary's losses in the layer of (1M, 3M), subject to a deductible of 1M to be covered by the primary.

  • Can you further explain how the deductible works with the retention for the layer? I am not following how the max reinsurer payout is $1M.

  • The example makes the assumption that there can only be one loss event during the coverage period. Should that loss be greater than 3M, the layer of loss between 1M and 3M will be covered by the reinsurer, i.e. 2M of coverage. There is additionally a 1M deductible clause to the treaty. The first 1M of the coverage is the primary's responsibility. This would apply so that the reinsurer's coverage for the said loss becomes 2M - 1M = 1M. This is the most the reinsurer will pay out.

  • A deductible clause is a new concept for me. To clarify, the insurer retains 1M per the terms of the reinsurance treaty being 2M xs 1M. Then in addition, the insurer has to cover the first 1M of the 2M reinsured layer (assuming there is a 3M loss) due to the deductible clause? If that's the case why wouldn't the retention just be 2M?

  • I'd say this is an unusual arrangement. It looks like it's set to trick the test-taker.

  • Can you confirm if this interpretation is correct?

    The insurer retains 1M per the terms of the reinsurance treaty being 2M xs 1M. Then in addition, the insurer has to cover the first 1M of the 2M reinsured layer (assuming there is a 3M loss) due to the deductible clause?

  • Yes, but note that reinsurance coverage starts at the excess of 1M in the 2M xs 1M layer, in other words, at the excess of a 2M loss. I mean it doesn't have to be a 3M+ loss.

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