📘 IC-85 REINSURANCE — FULL NUMERICAL GUIDE (WITH THEORY)
1️⃣ QUOTA SHARE (QS) — BASIC SINGLE-RISK NUMERICAL
Problem 1 – QS sharing of premium & claim
An insurer writes a Fire policy:
Sum Insured (SI) = ₹100 lakh
Premium = ₹2 lakh
Loss = ₹40 lakh
QS treaty: 40% quota share (ceded to reinsurer)
Required:
1. Split SI between cedant and reinsurer
2. Split premium
3. Split loss
Step-by-step solution
Step 1 — SI sharing
QS % ceded = 40%
Cedant retains = 60%
Cedant SI = 100 × 60% = ₹60 lakh
Reinsurer SI = 100 × 40% = ₹40 lakh
Step 2 — Premium sharing
Cedant premium = 2 × 60% = ₹1.2 lakh
Reinsurer premium = 2 × 40% = ₹0.8 lakh
Step 3 — Loss sharing
Loss = ₹40 lakh
Cedant loss = 40 × 60% = ₹24 lakh
Reinsurer loss = 40 × 40% = ₹16 lakh
Check: 24 + 16 = 40 → ok.
Linked Theory
QS = fixed percentage of SI, premium, and claims on every policy.
Once QS% is set, everything (SI, premium, losses) splits in that ratio.
This gives stability to the cedant: reinsurer always takes the same
proportion.
2️⃣ SURPLUS TREATY — SINGLE RISK (LINES, RETENTION, LOSS
SHARING)
Problem 2 – Surplus with retention and lines
Surplus treaty details:
Retention (1 line) = ₹20 lakh
Number of lines = 4
So max SI per risk under treaty = ₹20 × (1 + 4) = ₹100 lakh
Now, a risk with:
SI = ₹80 lakh
Premium = ₹1.6 lakh
Loss = ₹40 lakh
Required:
1. How much SI does cedant retain?
2. How much SI goes to surplus reinsurer?
3. How much premium is ceded?
4. How is the ₹40 lakh loss shared?
Step-by-step solution
Step 1 — Check capacity
Max SI treaty can handle = ₹100 lakh
Actual SI = ₹80 lakh → within capacity.
Step 2 — Retention and cession
Retention (fixed) = ₹20 lakh
Cession = SI − Retention = 80 − 20 = ₹60 lakh
Lines used = Cession / Retention = 60 / 20 = 3 lines (within 4 lines allowed)
Step 3 — Convert to percentages
Cedant % = 20 / 80 = 0.25 = 25%
Surplus % = 60 / 80 = 0.75 = 75%
Step 4 — Premium allocation
Premium = ₹1.6 lakh
Cedant premium = 1.6 × 25% = ₹0.40 lakh
Reinsurer premium = 1.6 × 75% = ₹1.20 lakh
Step 5 — Loss allocation
Loss = ₹40 lakh
Cedant loss = 40 × 25% = ₹10 lakh
Reinsurer loss = 40 × 75% = ₹30 lakh
Linked Theory
In surplus, retention is a fixed SI amount (line), not a %.
Cession = SI − Retention (capped by lines).
Critical rule: once retention and cession are known, all losses follow
SI %, not retention rupees.
Surplus is used where SI varies widely across risks.
3️⃣ COMBINED QS + SURPLUS — FULL STRUCTURE + LOSS SHARING
Problem 3 – QS + Surplus on one risk
Programme:
QS: 30% ceded
Surplus: Retention = ₹20 lakh, 4 lines (so max = ₹100 lakh)
Risk:
SI = ₹80 lakh
Premium = ₹1.6 lakh
Loss = ₹40 lakh
Required:
1. Final SI shares of Cedant, QS reinsurer, Surplus reinsurer
2. Premium shares
3. Loss sharing
Step-by-step solution
Step 1 — Apply QS first
QS = 30% of the whole risk.
SI to QS reinsurer = 80 × 30% = ₹24 lakh
Remaining SI for cedant = 80 − 24 = ₹56 lakh
Now, surplus operates on ₹56 lakh, not on 80.
Step 2 — Apply Surplus on cedant’s portion
Retention = ₹20 lakh
Cession capacity = 4 × 20 = ₹80 lakh
Required cession = 56 − 20 = ₹36 lakh (within 80 capacity, so ok)
So on cedant’s 56 lakh:
Retained = 20
Ceded to Surplus = 36
Step 3 — Final SI shares on the whole risk
Total risk SI = 80 lakh.
Cedant SI = ₹20 lakh
QS SI = ₹24 lakh
Surplus SI = ₹36 lakh
Check: 20 + 24 + 36 = 80 → ok.
Convert to percentages:
Cedant % = 20 / 80 = 0.25 = 25%
QS % = 24 / 80 = 0.30 = 30%
Surplus % = 36 / 80 = 0.45 = 45%
Step 4 — Premium split
Total premium = ₹1.6 lakh
Cedant = 1.6 × 25% = ₹0.40 lakh
QS reinsurer = 1.6 × 30% = ₹0.48 lakh
Surplus reinsurer = 1.6 × 45% = ₹0.72 lakh
Check: 0.40 + 0.48 + 0.72 = 1.60 lakh → ok.
Step 5 — Loss sharing
Loss = ₹40 lakh
Cedant loss = 40 × 25% = ₹10 lakh
QS reinsurer loss = 40 × 30% = ₹12 lakh
Surplus reinsurer loss = 40 × 45% = ₹18 lakh
Check: 10 + 12 + 18 = 40 → ok.
Linked Theory
Sequence is non-negotiable: QS first, Surplus second.
Surplus sees only the post-QS retained portion.
Once final SI splits are known, EVERY loss (any size) is split in that %
ratio.
This kills the common confusion: you do not treat retention as a
“deductible” in proportional treaties.
4️⃣ PROFIT COMMISSION — FULL ACCOUNTING EXAMPLE
Problem 4 – Profit commission calculation
A QS treaty cedes:
Ceded premium = ₹100 lakh
Ceding commission = 25%
Reinsurer’s internal expenses = 5% of ceded premium
Ceded claims (incurred) = ₹50 lakh
Profit commission = 30% of underwriting profit
Required:
1. Underwriting profit for the reinsurer
2. Profit commission payable
Step-by-step solution
Step 1 — Ceding commission
Ceding commission = 25% of 100 = ₹25 lakh
Step 2 — Reinsurer expenses
Reinsurer expenses = 5% of 100 = ₹5 lakh
Step 3 — Claims
Ceded claims = ₹50 lakh
Step 4 — Underwriting profit
Underwriting profit =
Ceded premium
− Ceding commission
− Claims
− Reinsurer expenses
= 100 − 25 − 50 − 5
= 100 − 80
= ₹20 lakh
Step 5 — Profit commission
Profit commission = 30% of underwriting profit
= 30% of 20 = 0.30 × 20 = ₹6 lakh
Linked Theory
Profit commission rewards cedant when reinsurer makes a profit.
Calculation always uses:
Premium − Commission − Claims − Reinsurer expenses
Often, deficit years are carried forward to reduce future profit
commission.
5️⃣ SLIDING SCALE COMMISSION — LOGIC WITH A SIMPLE TABLE
Problem 5 – Sliding Scale Commission
Treaty: QS 50% with sliding scale commission:
Loss Ratio Commission
band %
LR > 75% 20%
60–75% 25%
40–60% 30%
LR < 40% 35%
Ceded premium = ₹80 lakh
Ceded claims = ₹40 lakh
Required:
1. Find actual loss ratio
2. Determine commission rate
3. Compute ceding commission amount
Step-by-step solution
Step 1 — Loss Ratio (LR)
LR = Claims / Premium × 100
= 40 / 80 × 100
= 0.5 × 100
= 50%
Step 2 — Commission band
50% LR falls in 40–60% → commission = 30%
Step 3 — Commission amount
Commission = 80 × 30% = 0.30 × 80 = ₹24 lakh
Linked Theory
Sliding scale aligns cedant’s reward with profitability of treaty.
Better LR (lower losses) → higher commission.
Worse LR → lower commission.
Commission always computed on ceded premium, not gross
premium.
6️⃣ PER RISK XL — SINGLE LOSS
Problem 6 – Per Risk XL claim calculation
Treaty: “₹50 lakh XS ₹10 lakh per risk”
A policy suffers a loss of ₹70 lakh.
Required:
1. Cedant’s share
2. Reinsurer’s share
Step-by-step solution
Retention (R) = ₹10 lakh
Limit (M) = ₹50 lakh
Loss (L) = ₹70 lakh
Reinsurer’s liability = max(0, min(L − R, M))
Compute L − R = 70 − 10 = ₹60 lakh
Min(60, 50) = ₹50 lakh
So:
Reinsurer pays = ₹50 lakh
Cedant pays = L − 50 = 70 − 50 = ₹20 lakh
Linked Theory
In Per Risk XL, each loss is treated separately.
Cedant always pays first R; reinsurer picks next M, any excess above
R+M = cedant again.
This is non-proportional: no % sharing, only layer-based.
7️⃣ PER RISK XL — MULTIPLE LOSSES ON DIFFERENT RISKS
Problem 7 – Multiple claims under Per Risk XL
Same treaty: ₹50 lakh XS ₹10 lakh per risk
Losses in the year:
Loss 1 on policy A: ₹30 lakh
Loss 2 on policy B: ₹80 lakh
Loss 3 on policy C: ₹5 lakh
Required:
Calculate reinsurer’s payout per loss and in total.
Step-by-step solution
Loss 1 = 30
L − R = 30 − 10 = 20
min(20, 50) = 20
Reinsurer pays 20, cedant 10
Loss 2 = 80
L − R = 80 − 10 = 70
min(70, 50) = 50
Reinsurer 50, cedant 30
Loss 3 = 5
Since L ≤ R (5 ≤ 10), reinsurer pays 0, cedant 5.
Total reinsurer payout = 20 + 50 + 0 = ₹70 lakh
Linked Theory
Each loss is separately compared with retention and limit.
There is no annual cap here (unless an Aggregate XL cap is added).
This protects against large losses per risk, not events.
8️⃣ CAT XL — EVENT AGGREGATION
Problem 8 – Cat XL event recovery
Treaty: “₹200 crore XS ₹50 crore per event”
A flood event (defined within 168 hours) produces:
Loss 1 = ₹20 crore
Loss 2 = ₹30 crore
Loss 3 = ₹40 crore
All are within the same event window.
Required:
1. Event loss
2. Reinsurer’s payout
3. Cedant’s net retention
Step-by-step solution
Event loss E = 20 + 30 + 40 = ₹90 crore
Retention R = ₹50 crore
Limit M = ₹200 crore
Reinsurer payout = max(0, min(E − R, M))
E − R = 90 − 50 = 40
min(40, 200) = 40
Reinsurer pays ₹40 crore
Cedant retains total 90 − 40 = ₹50 crore
Linked Theory
Cat XL aggregates multiple losses into ONE event.
Retention is event-based, not per policy.
Hours clause decides which losses belong to the same event.
9️⃣ AGGREGATE XL — ANNUAL LOSSES
Problem 9 – Aggregate XL over the year
Aggregate XL: “₹100 crore in the aggregate XS ₹40 crore deductible”
Total net retained losses over the year (after all other RI) = ₹120 crore.
Required:
Reinsurer payout under Aggregate XL.
Step-by-step solution
Total losses A = 120
Deductible D = 40
Limit L = 100
Reinsurer payout = max(0, min(A − D, L))
A − D = 120 − 40 = 80
min(80, 100) = 80
Reinsurer pays ₹80 crore.
Cedant ends up with 40 + (120 − 120) = 40 crore net (conceptually: first 40,
rest passed to XL until limit).
Linked Theory
Aggregate XL covers cumulative annual losses.
It is good for portfolios with many small and medium losses.
It sits above all other covers.
🔟 STOP LOSS (LOSS RATIO XL)
Problem 10 – Stop loss based on loss ratio
Treaty: “130% XS 80% loss ratio”
Earned Premium (EP) = ₹100 crore
Actual Loss (AL) = ₹120 crore
Required:
1. Loss ratio
2. Reinsurer payout
3. Cedant’s effective loss ratio after cover
Step-by-step solution
Step 1 — Loss ratio
LR = AL / EP × 100 = 120 / 100 × 100 = 120%
Step 2 — Retention LR and Limit LR
Retention LR = 80%
Limit LR = 130%
Since actual LR = 120%, this is between 80 and 130.
Reinsurer pays losses between 80% and 120%:
Loss amount at 80% LR = 80% × EP = 0.80 × 100 = ₹80 crore
Actual losses = 120 crore
Reinsurer payout = AL − 80 = 120 − 80 = ₹40 crore
Step 3 — Cedant’s effective LR
Cedant’s net loss = AL − XL recovery = 120 − 40 = 80 crore
Net LR = 80 / 100 × 100 = 80%
Linked Theory
Stop loss protects loss ratio—not per risk, not per event.
Cedant retains losses up to a certain LR; beyond that XL takes over.
Great for health, crop, or portfolios where frequency risk dominates.
1️⃣1️⃣ REINSTATEMENT PREMIUM — XL
Problem 11 – Reinstatement premium
Per Risk XL: “₹50 lakh XS ₹10 lakh per risk, with 1 full reinstatement at 100%
additional premium (pro-rata as to amount used).”
Annual XL premium = ₹10 lakh
A single large loss uses 40% of the layer.
Required:
Reinstatement premium payable.
Step-by-step solution
Layer used = 40% → x = 0.40
Reinstatement rate = 100% → k = 1.0
Annual premium P = 10 lakh
Reinstatement premium = P × k × x = 10 × 1 × 0.40 = ₹4 lakh
Linked Theory
Reinstatement restores XL protection after usage.
Reinstatement premium is usually pro rata to amount used.
Some treaties have flat (full) reinstatement premium, regardless of
use.
1️⃣2️⃣ GNPI & BURNING COST FOR XL PRICING
Problem 12 – GNPI and burning cost
Portfolio data:
Gross written premium = ₹500 crore
Cancellations/refunds = ₹20 crore
Premium ceded to proportional treaties = ₹150 crore
Net XL-relevant premium = GNPI.
XL history for last 5 years (reinsurer’s share of losses):
Yr1 = ₹5 crore
Yr2 = ₹10 crore
Yr3 = ₹0 crore
Yr4 = ₹8 crore
Yr5 = ₹7 crore
Required:
1. GNPI
2. Average annual burning cost (as % of GNPI)
Step-by-step solution
Step 1 — GNPI
GNPI = Gross written − cancellations − proportional ceded premium
= 500 − 20 − 150
= 500 − 170
= ₹330 crore
Step 2 — Total XL losses over 5 years
Sum = 5 + 10 + 0 + 8 + 7 = ₹30 crore
Average annual = 30 / 5 = ₹6 crore
Step 3 — Burning cost as % of GNPI
Burning cost % = (Avg XL loss / GNPI) × 100
= 6 / 330 × 100
6/330 simplifies to 0.018181… ≈ 1.82% (approx).
So burning cost ≈ 1.82% of GNPI.
Linked Theory
GNPI = base premium for XL pricing.
Burning cost = average historical XL cost / GNPI.
Reinsurer then adds loadings for:
o expenses
o profit
o uncertainty
o brokerage
1️⃣3️⃣ CAT PML BY ZONE — SIMPLE SELECTION NUMERICAL
Problem 13 – Choosing Cat XL retention using zonal PML
You have 4 zones with PMLs (in crore):
Zone A = 150
Zone B = 100
Zone C = 80
Zone D = 60
You want to buy a Cat XL protection structured as: “₹X crore XS ₹Y crore per
event”.
Simplified target:
You want to retain up to 60 crore per event, and protect up to the
worst case PML.
Required:
Propose Y (retention) and X (limit).
Step-by-step reasoning (not strict math, but exam logic)
Worst PML = max(150, 100, 80, 60) = 150
You want retention = 60 (as given by management appetite).
So treaty:
Retention Y = ₹60 crore
Limit X = worst PML − retention = 150 − 60 = ₹90 crore
So structure = ₹90 crore XS ₹60 crore per event.
Linked Theory
For Cat XL, you look at zonal PMLs and choose retention + limit
accordingly.
Retention is what company is willing/able to hold.
Limit covers up to modelled PML (often 1-in-200 return period).
1️⃣4️⃣ LPT + ADC — SIMPLE NUMERIC IDEA
Problem 14 – LPT/ADC combination
An insurer has an outstanding claim reserve block of ₹200 crore on old
liability policies. It wants to transfer this to a reinsurer via LPT and buy ADC
for adverse development.
LPT premium = ₹190 crore
ADC limit = ₹60 crore
Actual losses finally settle at ₹240 crore.
Required:
1. How much does reinsurer pay under LPT?
2. How much additional under ADC?
Step-by-step solution
Step 1 — LPT portion
LPT takes over the entire reserve block at premium ₹190 crore.
Reinsurer pays all claims up to the reserve amount = ₹200 crore.
So:
For first ₹200 crore of claims: LPT responds fully.
Step 2 — ADC portion
Actual claims = 240 crore
LPT covers up to 200 crore
Excess = 240 − 200 = ₹40 crore
ADC limit = 60 crore → 40 < 60 → fully covered.
So ADC pays 40 crore.
Total reinsurer payments:
LPT = 200
ADC = 40
Total = 240 crore.
Linked Theory
LPT: transfer of existing reserves to reinsurer.
ADC: protects against development above the reserve.
Combined, they completely outsource reserve risk to reinsurer (subject
to limit).
1️⃣5️⃣ QUICK CUMULATIVE EXAMPLE — PROGRAMME FLOW (MIXED
TREATIES)
Problem 15 – Putting it together: QS + Surplus + Per Risk XL + Cat
XL
Programme:
QS: 20%
Surplus: Retention = ₹30 lakh, 3 lines
Per Risk XL: ₹70 lakh XS ₹10 lakh per risk (on net after prop)
Cat XL: ₹200 crore XS ₹50 crore per event
Single industrial risk:
SI = ₹150 lakh (₹1.5 crore)
Premium = ₹3 lakh
One event causes one total loss on this risk = ₹150 lakh. Assume no other
claims.
Required:
1. Final SI shares (Cedant, QS, Surplus)
2. Cedant net loss before XL
3. Per Risk XL recovery
4. Cat XL recovery (if any)
5. Final net retained by company
Step-by-step solution
Step 1 — QS
QS = 20% of SI = 150 × 20% = ₹30 lakh
Remaining for cedant = 150 − 30 = ₹120 lakh
Step 2 — Surplus on cedant’s 120 lakh
Retention (1 line) = 30 lakh
Lines = 3 → capacity = 30 × 3 = 90 lakh
Required cession = 120 − 30 = 90 lakh → fits exactly 3 lines.
So:
Cedant SI = 30 lakh
Surplus SI = 90 lakh
QS SI = 30 lakh
Total = 30 + 90 + 30 = 150 lakh
Convert to % of full risk:
Cedant % = 30 / 150 = 0.20 = 20%
QS % = 30 / 150 = 0.20 = 20%
Surplus % = 90 / 150 = 0.60 = 60%
Step 3 — Total loss allocation (before XL)
Total loss = 150 lakh
Cedant loss share = 150 × 20% = 30 lakh
QS = 150 × 20% = 30 lakh
Surplus = 150 × 60% = 90 lakh
Check: 30 + 30 + 90 = 150 lakh.
Cedant’s gross loss after prop = 30 lakh (this is what goes to XL).
Step 4 — Per Risk XL
Per Risk XL: 70 lakh XS 10 lakh, on net after prop.
Here, cedant’s net per risk loss = 30 lakh
Retention R = 10 lakh
Excess = 30 − 10 = 20 lakh
Limit = 70 lakh → reinsurer pays 20 lakh (under XL).
So:
XL reinsurer pays = 20 lakh
Cedant pays = 10 lakh net (per risk layer)
Step 5 — Cat XL
Event loss net of prop but before XL = 30 lakh
Event Cat retention = 50 crore → obviously 30 lakh < 50 crore → no Cat XL
recovery.
Step 6 — Final summary
Gross loss = 150 lakh
QS pays 30 lakh
Surplus pays 90 lakh
Per Risk XL pays 20 lakh
Cedant final net = 10 lakh
Linked Theory
This example shows full inuring order: prop treaties first, then per
risk XL, then Cat XL.
XL always acts on net after proportional treaties.
When event is small, Cat XL doesn’t trigger.
HOW TO USE THIS NUMERICAL GUIDE
1. Memorise the patterns, not the numbers.
2. For each type (QS, Surplus, QS+Surplus, XL, Cat, Aggregate, Stop Loss,
Reinstatement, GNPI, PML), be able to:
o sketch the structure
o write the formula by hand
o explain the logic in 2–3 sentences.
3. Next step (if you’re serious about >80% in the paper):
o You create your own variants with different numbers and re-
solve them.
o I can then check your solutions and point out any algebra or
logic mistakes.
If you want, I can now:
Build a dedicated “Numerical Workbook”: 30–40 unsolved
questions grouped by type,
OR take numericals directly from your III book PDFs and re-solve
them in this style, one by one.