Delta Insurance is a property insurer that entered into a surplus-share reinsura

Question

Delta Insurance is a property insurer that entered into a surplus-share reinsurance treaty with Eversafe Re. Delta has a retention limit of $200,000 on any single building, and up to nine lines of insurance may be ceded to Eversafe Re. A building valued at $1,600,000 is insured with Delta. Shortly after the policy was issued, a severe windstorm caused $800,000 loss to the building.

From Application Question #1 (Page 120), now assume that the building insured with Delta has a value of $2,000,000. (All the other conditions and numbers are constant.) Then, how much of the loss will Delta pay? Selected Answer: $200,000 Answers $80,000 $100,000 $200,000 $2,000,000

Explanation / Answer

Since Delta has a retention Limit of $200,000, this is the maximum limit any anything beyond this limit, the insurer cedes the risk to the reinsurer.

Now the building valued at $2,000,000 has a damage of $800,000. Since the retention limit of Delta is only 200,000 which is 10% of the value of the building, Delta will pay only for 10% of the damages.

Since the damages is of value 800,000, Delta will pay 10% for this which is $80,000

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