Question

Delta Insurance is a property insurer that enters into a reinsurance treaty for Eversafe Re. Delta has a retention limit of $200,000 on any single building. A building valued at $1,600,000 is insured with Delta. Shortly after the policy was issued, a severe windstorm caused a $800,000 loss to the building.

1.If the reinsurance is a excess-of-loss treaty with a maximum limit of $1,800,00, how much Delta Insurance has to pay for the loss?

2.If the reinsurance is a surplus-share treaty with nine lines of insurance ceded to Eversafe, how much Delta Insurance has to pay for the loss?

Answer 1

Solution:
Retention limit	$200000
Insured amount of Building	$1600000
Loss to Building	$800000
a)
Total Insurance	$1600000
Retention limit	$200000
Amount that Delta pays	(Retention limit/Total insurance)/Loss
	($200000/$1600000)*$800000
	$0.125*$800000
	$100000
The total insurance covers $1600000.The limit is $200000, therefore the amount that
Delta will pay is $100000
b)
Delta insurance has a retention limit of $2000000.Eversafe will retake the balance amount of
$1400000($1600000-$200000) Thus delta will pay ($1400000/$1600000)of Loss amount
Loss amount = $800000
Delta will pay =Loss amount *$1400000/$1600000
$800000*$1400000/$1600000
$700000