Surplus Share Reimbursement
(The attached PDF file has better formatting.)
The primary company insures a factory building, which falls under its surplus share treaty. The value of the factory is $5 million, and the amount of insurance is $4 million. The surplus share treaty has four lines with a retained line of $1 million.
If a fire causes a total loss of $5 million, what are the payments by the primary company and the reinsurer?
If a fire causes a partial loss of $3 million, what are the payments by the primary company and the reinsurer?
If the surplus share treaty has two lines with a retained line of $2 million, what are the payments by each company in Parts A and B?
Solution: We use the amount of insurance, not the value of the property. The four line surplus share treaty covers 75% of the primary company’s liability. The primary company’s liability for a total loss of $5 million is $4 million; the reinsurer pays $3 million and the primary company pays $1 million. For a loss of $3 million, the reinsurer pays $2.25 million and the primary company pays $0.75 million.
The two line surplus share treaty covers 50% of the primary company’s liability. Both the reinsurer and the primary company pay $2 million on the $5 million loss and $1 million on the $3 million loss.
I think there is a typo in the last sentence of the NEAS posting above. I believe that the "$1 million" should really read "$1.5 million," so the last sentence is:
Both the reinsurer and the primary company pay $2 million on the $5 million loss and $1.5 million on the $3 million loss.
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