Inuring Coverage
The Hurricane example at the bottom of the CATModels wiki computes the coverage paid under each policy as if there is no overlap in coverage with other treaties in place. Should it be obvious to assume that the payout of one treaty would be unaffected by the presence of the other, given they overlap on the same layer of loss?
Had I instead assumed that the Excess Treaty was inuring to the Pro-Rata Treaty, the primary insurer would have been responsible for an additional 0.6M (1.5M x 0.4 = 0.6M, excluding Excess Treaty's share of this layer). Is there ever a situation where I should be assuming that one treaty is inuring to another, or better to always assume not unless otherwise stated (ex. with interlocking clause)? If assumptions need to be made, is there a conventional "order of operations" if not explicitly stated (i.e., first apply excess coverage, then pro-rata coverage, etc.)?
Comments
Great question thanks. There's not really a satisfactory answer here as it all depends on the exact wording of the treaties/question. Unless the question explicitly says one treaty inures to the benefit of another treaty or there is clearly no overlap (i.e. distinct layers, cat vs. non-cat losses etc.) then you're left assuming they run concurrently.
Your best bet for the exam is to draw a diagram of your interpretation of the question on the scratch pad and then bullet point your assumptions such as excess inuring to benefit pro-rata. As far as we're aware there isn't a standard order of operations as reinsurance is typically bespoke to suit each individual client's needs.
Thanks for the reply. Stating our assumptions and working within them is usually a safe strategy for on the exam, as long as we refrain from making incorrect assumptions. I agree with your point of reinsurance contracts generally being custom suited to the client's needs, so there is unlikely an incorrect assumption here if the question does leave room for interpretation.
Thanks again.