WorldWide Insurance is a property insurer that entered into an excess of loss tr

Question

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

Please show work so this can be understood.

a. How much of the loss will WorldWide pay?

b. How much of the loss will XYZ Re pay?

c. What is the maximum amount of insurance that WorldWide can write on a single building under the reinsurance agreement? Explain your answer.

Explanation / Answer

a). Answer :- WorldWide will pay loss amounting to the $ 200,000. (Equal to the retention limit).

b). Answer :- Loss to be borne by XYZ = $ 600,000 (800000 - 200000).

c). Answer :- Maximum amount of insurance to be written on the single building = 200000 * 9 + 200000.

= 1800000 + 200000

= $ 2,000,000.

Conclusion :- Maximum amount of insurance to be written on the single building = $ 2,000,000.

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