Question

Question No. 1:-

Explain the concept of large numbers of law in the insurance sector, and then determining the six requirements of an insurable risk.

Question No. 2:-

Delta Insurance is a property insurer that enter into a surplus reinsurance treaty with Ever safe Re. Delta has a retention limit of $200,000 on any single building, and up to nine lines of insurance may be ceded to Ever safe. A building valued at $1.6m is insured with Delta. Shorty after the policy was issued; a severe windstorm caused a $800,000 loss to the building.

1. How much of the loss will Delta pay?
2. How much of the loss with Ever safe pay?
3. What is the maximum amount of insurance that Delta can write on a single building? Explain your answer.

Answer 1

Answer :-

2)

(a)Total insurance = $1,600,000

Retention limit = $200,000

Amount that Delta pays = (Retention limit / Total insurance)

lossAmount = ($200,000 / $1,600,000)$800,000

Amount = $100,000

The total insurance covers $1,600,000.

The limit is $200,000therefore the amount that Delta will pay is $100,000.

(b)

The total amount of damage was said to be $800,000.

If Delta only has to pay $100,000

(C)

For one line Delta = $200,000

9 lines of insurance = 9 ($200,000) = $1,800,000

Ceded to the insurer = $1,800,000

Retention limit = + $ 200,000Max. number of insurance = $ 2,000,000

1)

●Insurance companies use the law of large numbers to estimate the losses a certain group of insureds may have in the future.

● The law of large numbers states that as the number of policyholders increases, the more confident the insurance company is its prediction will prove true.

Six requirements:-

●The loss must be due to chance. ...

●The loss must be definite and measurable. ...

●The loss must be predictable, meaning it must be of such a nature that its frequency and average severity can be readily determined to establish the required premium.

●The loss cannot be catastrophic

●The loss exposures must be large.

●The loss exposure must be randomly selected.

(Or)

A risk is suited for insurance if it meets the following requirements:

1. The number of similar exposure units is large 2. The losses that occur are accidental.

3. A catastrophe cannot occur.

4. Losses are definite.

5. The probability distribution of losses can be determined.

6. The cost of coverage is economically feasible.