Reinsurance and Market Shock Analysis

This document provides a tutorial on reinsurance and arrangements (ART) with 6 practice questions. It discusses key reinsurance concepts like information asymmetry between buyers and sellers of insurance. It also lists different sources of capital available to insurers and analyzes the statement that the WTC event did not create hard markets. The questions cover identifying reinsurance contracts, calculating payments under contracts, and allocating losses between cedants and reinsurers under surplus treaties.

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Reinsurance and Market Shock Analysis

Uploaded by

Don Đỗ

We take content rights seriously. If you suspect this is your content, claim it here.

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Download as DOC, PDF, TXT or read online on Scribd

Reinsurance & ART Tutorial

Tutorial 1

The following questions are based on Implications of Market Shocks: Capacity, Price
Volatility and the Value of Transparency

1. Insurance, by its very nature, is rid with information asymmetries. Discuss this
statement in regard to both buyer and seller.

2. Internal capital is less expensive than external capital. It is important to understand the
different sources of capital and how they can be allocated in support of risk-taking
activities. List the various sources of capital available to insurers.

3. The WTC event did not create the hard markets. Critically analyse this statement.

The following are practice questions on Reinsurance Treaties and Arrangements

4. Liability Insurance Company writes a substantial amount of commercial liability

insurance. A large construction company requests $100 million of liability insurance
to cover its business operations. Liability Insurance has a reinsurance contract with
Bermuda Re that enables the coverage to be written immediately. Under the terms of
the contract, Liability Insurance pays 25 per cent of the losses and retains 25 per cent
of the premium. Bermuda Re pays 75 per cent of the losses and receives 75 per cent
of the premium, less a ceding commission that is paid to Liability Insurance. Based on
the preceding, answer the following questions:

a. What type of insurance contract best describes the reinsurance arrangement

that Liability Insurance has with Bermuda Re?

b. If a $50 million covered loss occurs, how much will Bermuda Re have to pay?
Explain your answer.

c. Why does Bermuda Re pay a ceding commission to Liability Insurance?

5. Delta Insurance is a property insurer that enter into a surplus reinsurance treaty with
Everest 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. A building valued at $1.6m is
insured with Delta. Shorty after the policy was issued; a severe windstorm caused a
$800,000 loss to the building.

a. How much of the loss will Delta pay?

b. How much of the loss with Eversafe pay?

c. What is the maximum amount of insurance that Delta can write on a single
building? Explain your answer.
6. As part of a surplus treaty the following is agreed: