Company C has purchased risk excess of loss (XL) cover for its property portfolio.

A reinsurer R offers a £3M xs £5M layer of reinsurance with these characteristics:

a. Losses occurring

b. One-year policy incepting 1 April 2011

c. Reinsurance premium = £400k

d. Two reinstatements only, the first is a free reinstatement, and the second is a 50% premium reinstatement

e. No index clause i. Explain what ‘losses occurring’ means ii. Explain what we mean by ‘reinstatement’ and why reinstatements may be a desirable feature for both the reinsurer and the reinsured iii. What is the maximum amount that can be recovered by C from R (show your reasoning)?

iv. During the policy year, company C has experienced only two losses of more than £5M: £7.5M and £11.7M. Calculate the total amount of reinsurance premium paid by C to R, and the total amount of claims recovered by C from R v. Why do you think the index clause is not used in this case? In replying to this, you should mention the purpose of the index clause, but you need not explain how the index clause works