Question

An insurance company has purchased a Catastrophe reinsurance policy. The insurance company’s retention is $10,000,000. The insurance company has aggregate cat losses of $13,000,000.

(a) What is the gross loss to the insurance company, prior to reinsurance?

(b) What is the net loss to the insurance company, after reinsurance recoveries?

Answer 1

Reinsurance is a form of insurance purchased by insurance companies in order to mitigate risk. Essentially, reinsurance can limit the amount of loss an insurer can potentially suffer. In other words, it protects insurance companies from financial ruin, thereby protecting the companies customers from uncovered losses.

Catastrophe reinsurance is purchased by an insurance company to reduce its exposure to the financial risks associated with a catastrophic event occurring. Catastrophe reinsurance allows the insurer to shift some or all of the risk associated with policies that it underwrites in exchange for a portion of the premiums that it receives from policyholders.

Here Our Insurance company has purchased a reinsurance with other insurer.That means former insurance company is trying to reduces its losses by reinsurance cover (Re Insurance Ceded - Given )

Our Retention In Re Insurance $ 10,000,000 ( Our Share of Loss in that re insurance given)

Aggregate Cat Loss $ 13,000,000

a) Gross loss to the insurance Company prior to ReInsurance is $ 13,000,000

b) Net Loss after Reinsurance Would be the same because he have been given our share of retention and not the share of reinsurer .i.e., $ 13,000,000