Reference no: EM132976592

Question - XYZ insurance company that accepts fire business up to a maximum sum insured of $500,000 considers the following excess of loss reinsurance programme, which is designed to limit its maximum liability per risk to $100,000. Risk excess cover of $400,000 in excess of $100,000 with premium adjustable at 15% of gross net premium income (GNPI). This cover has one reinstatement pro rata as to amount, payable at 30%.

Assume:

(1) XYZ insurance company's GNPI is $10 million and that its commission and expense ratios relative to the GNPI are 15% and 20%, respectively;

(2) no reinsurance commission paid for the cover.

(3) during the treaty year, the total claim amount to 3 million. Only two claims (i.e., $350,000 and $520,000) exceed the $100,000 deductible under the proposed risk excess of loss cover.

Required - Calculate the total reinsurance premium and net profit of XYZ insurance company by utilizing this cover. Show all your work.