Surplus Share Example (page 3 of 52)
Hi,
This is just a point of conversation for the example on the surplus share:
In reality, a reinsurer would not allow a cedant to cede a risk above (retained line + nb of ceded lines); in the examnple this would be 100K + 4*100K = 500K.
The case of the last two risks with insured values of $1M and $10M is what caught my attention. I suppose this is more of an academic example.
Anyone else has experience with Surplus Shares and can corroborate (or provide counter examples) ?
Comments
The main purpose of a surplus share treaty is to limit the reinsurer's exposure to a risk. The insured value of a risk refers to the primary insurer's exposure. As the insured value becomes increasingly large compared to the retained line + number of lines, the percentage of the insured value ceded to the reinsurer decreases.
As the insured value increases, the reinsurer is exposed to more potential loss dollars but at a decreasing rate, so their ultimate exposure on the risk is limited.
Thanks! This would make for a good Bloom type essay question.