The Bright Side of Insurance: Understanding Treaty Types
How is the distribution of the loss calculated between Roll Fire Insurance and Girnar Re?
If a $5,000 loss has occurred, how is it divided between the two insurance companies?
Which type of treaty is described in the scenario?
Based on the distribution of the loss, what type of treaty does this situation represent?
How much would Franklin Re pay in the event of a $5 million hurricane loss?
If a $5 million hurricane loss occurs, how much would Franklin Re be responsible for covering?
Loss Distribution and Treaty Type:
In the first scenario, the distribution of the $5,000 loss between Roll Fire Insurance and Girnar Re is as follows:
Roll Fire Insurance, with a retention limit of $200,000 (two-fifths of the total line), will cover $2,000 of the loss.
Girnar Re, which has ceded $300,000 (three-fifths of the total line), will cover $3,000 of the loss.
This scenario represents a quota share treaty. In a quota share treaty, a portion of the risk is ceded to the reinsurer, and the reinsurer agrees to cover a fixed percentage of each policy issued by the primary insurer.
Excess-of-Loss Treaty and Payment Calculation:
In the second scenario, Franklin Re would pay $4 million for the $5 million hurricane loss. Since Apex Fire Insurance has a retention limit of $1 million, Franklin Re is responsible for covering losses exceeding that amount, up to a maximum of $10 million.
Therefore, Franklin Re would cover the difference between the loss amount and the retention limit, which is $4 million in this case. This type of arrangement is known as an excess-of-loss treaty, where the reinsurer covers losses that exceed a predetermined threshold.
Exploring the Positive Side of Insurance Treaties:
Insurance treaties play a crucial role in risk management and financial protection for both insurance companies and reinsurers. Understanding the distribution of losses and the types of treaties involved can shed light on the intricate workings of the insurance industry.
By analyzing the scenarios provided, we can see how Roll Fire Insurance and Girnar Re collaborate in sharing the risk of a loss, showcasing the concept of a quota share treaty. This treaty allows for a balanced distribution of risks and responsibilities between the primary insurer and the reinsurer.
Furthermore, the example involving Franklin Re and Apex Fire Insurance illustrates the effectiveness of an excess-of-loss treaty in providing coverage for catastrophic events such as hurricanes. In this arrangement, the reinsurer steps in to cover losses beyond a certain threshold, offering financial security and stability to the primary insurer.
Overall, these scenarios highlight the importance of cooperation and strategic partnerships in the insurance industry, paving the way for a brighter and more resilient future in risk management.