Fall 2013 Q19 d)

judyohjudyoh
in F-17-ULAE
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What is meant by "retention has been exceeded but the limit has not yet been exhausted"?

I understand that the ultimate projection is overstated so the reinsurance recoverable is overstated (since recoverable = ultimate loss - excess of loss reinsurance limit). I'm not understanding the question and the latter part of the solution "Higher L/ALAE above retention in the xs layer. The limit is not exhausted -> recovery is possible for losses, retention."

Comments

  • GrahamGraham

    Here is an example of what is meant by "retention has been exceeded but the limit has not yet been exhausted"

    Suppose the retention is $100 and the limit is $500, and an insurer makes a claim to the primary insurer of $150.

    • The primary insurer would pay the first $100 (leaving $50)
    • The reinsurer would pay the remaining $50 because that's within the $500 reinsurance limit.
    • (There is then $450 of unused recovery.)

    If however the original claim were $750, then:

    • The primary insurer would pay the first $100 (leaving $650)
    • The reinsurer would pay $500 but no more because the limit is $500 (leaving $150)
    • the primary insurer would then have to pay the remaining $150 because they've exhausted the limits of their reinsurance coverage.

    Answer D is saying that even though the estimate of ultimate would be overstated, the primary insurer would still fully recover the amount above the retention because the limits of coverage had not been reached. That's similar to the first example I provided above.

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