3. An insurance company has quota share treaty with two reinsurers (A and B). Th

Question

3. An insurance company has quota share treaty with two reinsurers (A and B). The retention limit of the insurance company is set to 60%. Reinsurer A has a share of 30% on the loss with a limit of 100.000.USD, whereas Reinsurer B has a share of 10% on the claims with an upper limit given as 50,000.USD. Given the insured value of 2 million USD and under the assumption that no excess loss agreement is done, determine the distribution of a loss amount of 600,000.USD among insurance company and its reinsurers.

Explanation / Answer

NOTE: A quota share treaty is an agreement between an insurance company and another insurer or any other willing third party which divides the claims, losses, coverage limit and policy premiums between the insurance company and the third party in a fixed proportion as per the agreement. As a particular insurance company underwrites (guarantees indemnity against potential losses) insurance policies more and more of its resources get tied up and hence after a point it feels the need to share those underwritten insurance liabilities with a third party which is the reinsurer in this case. The sharing of insurance liability is done through a formal contract and is known as the quota share treaty. A insurance company might agree to a 30% retention limit which implies that 30% of all claims, coverages and premiums will be retained by itself and the remaining 70% shared with the reinsurer.

In this case the retention limit is 60% which implies that the insurance company will retain 60% of the insured value(policy coverage) and hand over the remaining to its reinsurers.

However, reinsurer A will cover only upto $ 100000 and no more. Similarly, reinsurer B will cover only upto $50000 and no more.

Therefore, if the loss amount is $600000 , the reinsurers A and B together would share either their fixed % of losses or the respective maximum loss shares whichever is lesser.

Hence, Total Loss = $600000

A's share of losses = $ 100000 and B's share of losses = $ 50000.

Therefore, loss amount remaining = 600000 - (100000 + 50000) = $ 450000

The entire remaining amount will have to be borne by the insurance company even though the quota share agreement limits retention to 60%(because there is no excess loss guarantee agreement).

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