CAS Exam 6C Fall 2018, Question 18
Study guide: Exam 6C
A property and casualty insurance company is seeking to purchase an excess of loss reinsurance policy which contains the following features.
| Feature | Value |
|---|---|
| Inception Date | 1/1/2018 |
| Subject Premium | $20,000,000 |
| Provisional Reinsurance Rate | 14.0% |
| Provisional Premium | $2,800,000 |
| Retention | $1,000,000 |
| Limit | $10,000,000 |
| Swing Loss Ratio | 75.0% |
| Minimum Rate | 8.0% |
| Maximum Rate | 20.0% |
- The swing rate payment is due three years after the policy's inception.
- The reinsurer's total expenses are 20% of the premium.
- Losses will be paid as they occur.
- The policy is automatically commuted after seven years unless the insurance company pays an additional maintenance fee of $175,000.
- The premium is payable in quarterly instalments throughout the first year and is subject to a 9% premium tax.
Part a (1 point)
Briefly describe the four key principles of risk transfer.
Part b (0.5 points)
Define "reasonably self-evident" risk transfer.
Part c (1.25 points)
Briefly describe three potential risk-limiting features of this contract and two features that do not limit risk transfer.
Answer this question and see the worked solution