Question

A large oil company requests ¢200 million of liability insurance to cover its oil business. State Insurance Company (SIC) has a reinsurance contract with Ghana Re that enables the coverage to be written immediately. Under the terms of the contract, SIC pays 30 percent of the losses and retains 30 percent of the premium. Ghana Re pays 70 percent of the losses and receives 70 percent of the premium, less a ceding commission that is paid to SIC. Answer the following questions:

a. What type of reinsurance contract best describes the arrangement between the two insurance companies? Explain your answer.
b. Supposing a ¢100 million covered loss occurs, how much will each insurance company have to pay? Explain your answer.

Answer 1

a. The reinsurance contract between SIC and Ghana Re is a proportional reinsurance contract. This type of contract specifies that the reinsurer (Ghana Re) will share a fixed proportion of the premiums and losses with the ceding company (SIC). In this case, the contract specifies that Ghana Re will pay 70 percent of the losses and receive 70 percent of the premiums, while SIC will pay 30 percent of the losses and retain 30 percent of the premiums.

b. If a ¢100 million covered loss occurs, SIC will be responsible for ¢30 million of the loss, while Ghana Re will be responsible for ¢70 million of the loss. This is because the contract specifies that SIC will pay 30 percent of the losses, and Ghana Re will pay 70 percent of the losses. In terms of premiums, SIC will retain ¢60 million of the premium, while Ghana Re will receive ¢140 million of the premium, less the ceding commission that is paid to SIC.