2014 Fall 8b

The answer in the text says insurer losses are greater than 5M but at the top of the page it says 200M in aggregate insurer losses are required for a loss to be covered under TRIA. So should the requirement to be covered for a terrorism loss, an insurer must have 5M in losses and the insurance industry must have 200M in insurance losses?

Comments

  • It isn't very clear in the text, but for certification, the aggregate insurer losses must be > 5 million, but for the federal government to starting paying, the aggregate insurer losses must be > 200 million.

    (Actually, in this 2014 problem, the government would begin paying when aggregate losses reach 100 million but in 2016, this threshold increased to 120 million and will go up 20 million per year until it reaches 200 million)

  • The $27.5B retention is confusing to me. Does this mean if industry losses are below $27.5B, private pays 15% of total losses, and government pays 85%. But then government will recoup its payment by requiring private to pay back 133% of its WP/EP (coverage).

    If industry loss is above $27.5B, government can seek reimburse more than 133% ?

  • Your first point is correct but your second point isn't. There are 2 things happening here:

    1. The government pays 85% of the losses up front (assuming the required conditions are met: aggregate losses > 100m, 20% deductible is met.) If aggregate losses reach 100b then no coverage is provided by either federal govt or private insurers.
    2. The government recoups these payments over the next few years. They recoup 133% of what they paid out (133% x 85%) on aggregate insured losses less than 27.5b. If aggregate insured losses are greater than 27.5b the recoupment percentage is lower than 133%

    Note that in the 2015 TRIA update, the value of 27.5b will increase to 37.5b by the year 2020, and the recoupment percentage will increase from 133% to 140%.

    Also note that details of the recoupment calculation are in the appendix, but the CAS syllabus only covers pages 5-11 so the appendix is excluded.

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