May 13'23
Exercise
A primary insurance company has a 100,000 retention limit. The company purchases a catastrophe reinsurance treaty, which provides the following coverage
Layer 1: 85% of 100,000 excess of 100,000
Layer 2: 90% of 100,000 excess of 200,000
Layer 3: 95% of 300,000 excess of 300,000
The primary insurance company experiences a catastrophe loss of 450,000.
Calculate the total loss retained by the primary insurance company.
- 100,000
- 112,500
- 125,000
- 132,500
- 150,000
Copyright 2023. The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.
May 13'23
Key: D
The retained loss is 100,000 + 0.15(100,000) + 0.10(100,000) + 0.05(150,000) = 132,500.
Copyright 2023. The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.