Umbrella exposure formula with drop down
In this example, when the Umbrella drops down to cover the underlying exposure, the formula seems to imply that the reinsurance treaty would cover losses of 500xs500 on an underlying limit of $1M xs 0.
Is this truly the case here with the E[X;0.5] at the end of the numerator (page 33 of 52)
Comments
Yes, the umbrella policy covers 1 million of losses which is usually the layer 1m to 2m unless the insured has exhausted their aggregate retention. In that case, the umbrella policy still covers 1 million of losses but for the layer 0m to 1m. The reinsurance treaty on the umbrella policy tracks with it. So it always covers the second 500k of the umbrella policy which is usually 1.5m to 2m but when the umbrella drops down it's covering 500k to 1m.