Reinsurance Arrangement Quiz

Based on the following, calculate the reinsurance allocations between the cedant/insurer and reinsurer for the risks with the sum insured as shown below. RM20,000 RM600,000 RM4,000,000

Answer explanation

To allocate reinsurance, determine the proportion of each sum insured. For RM20,000, the cedant retains the full amount. For RM600,000 and RM4,000,000, apply the agreed retention limits to find the cedant's and reinsurer's shares.

Calculate the following: gross retention (1 mark) net retention (1 mark) total underwriting capacity. (1 mark) risk apportioned to the cedant, quota share and surplus reinsurer if the sum insured is RM300,000 (6 marks) the loss apportioned between the cedant, quota share and surplus reinsurer if the loss is RM82000 (3 marks)

Answer explanation

Gross retention is the total amount retained by the cedant. Net retention is gross retention minus reinsurance. Total underwriting capacity is the sum insured. Losses are apportioned based on the quota share and surplus agreements.

Gross retention = RM200,000 ........................................(1 mark) Net retention = RM 20,000 ............................................(1 mark) Total underwriting capacity = RM200,000 + (4 x RM200,000) = RM1,000,000 .....................(1 mark)

Answer explanation

Gross retention is RM200,000, while net retention is RM20,000. The total underwriting capacity is calculated as RM200,000 plus four times RM200,000, resulting in RM1,000,000, confirming the calculations are correct.

RISK (RM) RETENTION (RM) % QUOTA SHARE (RM) % SURPLUS (RM) % 300,000 20,000 (1 mark) (20000/300000)100 6.67% (1 mark) 180,000 (1 mark) (180000/300000)100 60% (1 mark) 100,000 (1 mark) (100000/300000)100 33.33% (1 mark)

Answer explanation

The retention is 20,000 RM, which is 6.67% of the total risk of 300,000 RM. The quota share is 180,000 RM, making it 60%, and the surplus is 100,000 RM, which is 33.33%. These percentages are calculated by dividing each amount by the total risk.

LOSS (RM) RETENTION (RM) QUOTA SHARE (RM) SURPLUS (RM) 82,000 6.67% of 82000 5,469.40 (1 mark) 60% of 82000 49,200 (1 mark) 33.33% of 82000 27,330.60 (1 mark)

Answer explanation

The correct choice for QUOTA SHARE is 60% of 82,000, which equals 49,200 RM. This represents the portion of the loss retained by the insurer under a quota share agreement.