Question

HIJ Insurance Company, the primary insurer, has a surplus line reinsurance agreement with KLM Insurance Company, the reinsurer. The line under the policy/agreement is $25,000, and the amount ceded is $100,000. What percentage of the policy premium would KLM receive and what percentage of the losses under the policy would KLM be responsible for paying?

Please provide step by step solution.

Answer 1

HIJ Insurance Company, the primary insurer will have a liability equivalent to line under the policy agreement - $25,000

KLM Insurance Company, the reinsurer will have a liability of $100,000 if the claims for the particular insurance exceeds $25,000

The total insurance liability is $ 125,000 divided as follows -

1. HIJ Insurance Company - ( 25,000 / 125,000) = 20% of the total liabilities
2. KLM Insurance Company - ( 100,000/ 125000) = 80% of the total liabilities

Hence, as explained above KLM would received 80% of the policy premium and will also be responsible for 80% of the losses under the policy.

Please note - '/' this sign indicates division