Page 240 - Reinsurance Management IC85

The Insurance Times

The shape (or power) of the Pareto curve alters
with the class of risk or portfolio to be protected
under excess of loss cover. It may be observed that
larger proportion of total loss cost will occur in the
lower range of sums insured.

We can use this curve to work out the premium for
an excess of loss of cover for a risk with Total
Sum Insured Rs. 100 Crores and cover requirement
of -:

Rs. 50 Crores Xs Rs. 30 Crores

i.e. 50% Xs 30%

94.9%,of Total Losses fall within 80% ( 50%+ 30%)

56.8% of Total Losses fall within 30%

Loss cost to Layer 50% Xs 30% = 94.9 - 56.8 = 38.1%

If the original gross premium at the rate of, say, 2
per mille, is Rs.20,00,000 the XL underwriter would
require Rs.7,62,000 (i.e. 38.1% of Rs.20 Lakhs ) as
premium for the layer Rs. 50 Crore Xs Rs. 30
Crores. Similarly exercise can be conducted for
different cover requirements.

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