Question

Assume that ABC Insurance has a surplus share treaty with DEF Re. ABC has a retention limit of $200,000 for a single policy and four lines are ceded to DEF Re. Assume that a $150,000 property insurance policy is issued. How much does DEF Re pay if a $100,000 loss occurs?

Answer 1

DEF Re does not pay anything for the $100,000 loss in this case.

Step-by-step explanation:

In a surplus share treaty, the ceding company retains a portion of the risk and cedes the remaining portion to the reinsurer. In this case, ABC Insurance has a retention limit of $200,000 for a single policy and four lines are ceded to DEF Re. If a $150,000 property insurance policy is issued and a $100,000 loss occurs, we can calculate the amount DEF Re pays as follows:

Total ceded amount = (Total policy limit - Retention limit) x Ceded lines / Total lines

Total ceded amount = ($150,000 - $200,000) x 4 / 4

Total ceded amount = $0

Since the total ceded amount is $0, DEF Re does not pay anything for the $100,000 loss.