Question

ABC Insurance Company has decided to reinsurance all of their property business on a quota share basis with 123 Re. Under the terms of the agreement, ABC Insurance is responsible for 30% of losses. 123 Re is responsible for 70%. ABC Ins. underwrites a policy for Vandelay Industries. This falls within the parameters of the reinsurance treaty. The policy limit is $1,000,000 and the premium is $50,000. How much will each insurer pay out in losses for the following claims?

ABC Insurance 123 Re Claim #1: $100,000 Claim #2: $250,000

How much will each company receive in premiums? Assume that the ceding commission is 5% of premium. —How will Vandelay Industries pay the premium? —How will Vandelay Industries receive payment for losse

Answer 1

All premium will be paid by Vandelay Industries to ACB; Out of this, 70% of premium is paid by ACB to 123 Re for reinsurance; A ceding commission is paid by 123 Re to ACB; Therefore net premium received b ACB will be 65% of premium.

Premium to ACB is 35% (30%+5%) of total premium = 0.35*50000=17500; Premium to 123 Re is 65% of premium =0.65*50000=32500

Claim #1: $100,000: ACB bears loss of 30% of total loss= 0.3*100000=30000; 123 Re bears 70% of loss=0.7*100000=70000

Claim #2: $250,000: ACB bears loss of 30% of total loss= 0.3*250000=75000; 123 Re bears 70% of loss=0.7*250000=175000