United Insurance Company insures Travelco for fire insurance. United reinsures 4
ID: 2771572 • Letter: U
Question
United Insurance Company insures Travelco for fire insurance. United reinsures 40% of this exposure with Promises Reinsurance company on a prorata basis. If a $400,000 insured loss occurs at Travelco, Promises Reinsurance will pay United:
United Insurance Company insures Travelco for fire insurance. United reinsures part of the exposure with Promises Reinsurance Company on an excess of loss basis, with United’s retention loss level equal to $150,000. In this instance, assuming a $400,000 insured loss, Promises will pay to United:
Explanation / Answer
Reinsurance is spreading of risk between insurance companies. The two major types are pro rata basis and excess of loss basis.
Case (a)
On a 40% pro rata basis. On pro rata basis, the reinsurer will receive percentage of premium and share percentage of claims. Travelco will pay united insurance company 40% of the loss, which is 40% of USD 400,000= USD 160,000
Case (b)
On excess of loss basis, Promises will pay united if there is a event of loss and any loss amount in excess of retention loss level. So in this case,
Promises will pay united = Insured loss - Retention loss level = USD 400,000 - USD 150,000 = USD 250,000
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