Answer:
Part a.
D entered in surplus share reinsurance treaty with E. D has a retention limit of $200,000 for a single building and up to nine lines of building can be ceded to E.
The value of the building is $1,600,000 and there is a loss of $800,000. Compute the loss that delta will pay in the following manner: Compute the underwriting capacity of 0 as follows:
Underwriting capacity = $200,000 + $200,000 x 9
= $200, 000 + $1,800, 000
= $2, 000,000
Therefore, the underwriting capacity of D is $2, 000,000
The policy issued is for $1.600.000. Compute the fraction of D and E as follows:
D = 200000 / 1600000
D = 1/8th
E = 1400000 / 1600000
E = 7/8th
Therefore: the fraction of D is 1/8th and fraction of E is 7/8th
Compute the loss to be borne by D as follows:
Loss borne by D = Total loss x Fraction of D
Loss borne by D = 800,000 x 1/8
Loss borne by D = 100000
Therefore, the loss to be borne by D is 100000
Part b.
Compute the amount that E would pay in the similar manner.
E would share for seven eighth of the loss. Here, the loss is of $800,000.
Loss borne by E = Total loss x Fraction of E
Loss borne by E = 800,000 x 7/8
Loss borne by E = 700,000
Therefore, the loss repay by E is 700000
Part c.
This is a case of surplus share treaty where the re insurer accepts the insurance exceed in the retention limit of ceding company up to the maximum amount.
D has a retention limit of $200,000 for a single building so the total underwriting capacity for the 10 buildings will be 2000000
