Question

An insurance company has purchased a per risk Excess of Loss reinsurance policy. The insurance company’s retention is $500,000. The insurance company has the following 10 claims:

Claim 1 = $1,000,000

Claim 2 = $200,000

Claim 3 = $500,000

Claim 4 = $600,000

Claims 5 to 10 are less than $100,000 each

(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

Excess of loss reinsurance is a kind of non-proportional reinsurance. It is a type of reinsurance which subject to specified limit indemnifies reinsured company against part or all of amount of loss in excess of insured retention amount. This reinsurance form has generic term used in contract such as per risk or as per claim, per occurrence and in aggregate.

1. Gross loss to reinsurance company prior to reinsurance shall include the sum of all the claims.

Gross loss = Sum of all the claims

                    = $2,900,000

2. As per question, generic term used here is per risk i.e. per claim. Hence, any claim above retention amount of $500,000 shall be compensated by the reinsurance company. This is done below:

Claim S.No.	Amount of Claim	Above $500,000
1	$1000,000	$500,000
2	$200,000	NIL
3	$500,000	NIL
4	$600,000	$100,000
5 to 10 Qty 6 claims	$100,000 each	NIL for each claim
Total	$2,900,000	$600,000

Reinsurance recoveries amount will be to the extent of $600,000 only due to excess of loss reinsurance policy taken

Hence, Net Loss to insurance company after reinsurance recoveries = $2,900,000 - $600,000 = $2,300,000