Reinsurance Actex Qs

Question 1

State the 10-10 rule for testing risk transfer for reinsurance contracts

Answer 1

if the reinsurer has a 10% chance of suffering a 10% loss, then the contract is deemed to have transferred risk.

Question 2

Provide two examples of reinsurance contracts that may pose significant risk of loss to a reinsurer but fail the 10-10 rule. Briefly explain why this can happen for each of the examples

Answer 2

A) and excess of loss contract would fail the rule if loss reimbursement occurs only above the 90th percentile. Nonetheless, the reinsurer’s loss in such a case could be very high.
B) a quota share contract would fail the rule if the reinsurer assumes a high percentage of the exposure on a profitable book of business. Because of the books’s profitability, the reinsurer may only experience a 10% loss above the 90th percentile.

Question 3

Discuss the shortcoming of the 10-10 rule.

Answer 3

the rule focuses on one point, the 90th percentile, and ignores the possibility that significant risk may be transferred at higher percentiles.