ABC insurance company is writing risks of dissimilar size (i.e., medium and large). In order to gain more market share in the primary market and to retain a risk portfolio of similar size, ABC insurance company decides to use reinsurance in this calendar year.

1. Explain, with justification, what type of reinsurance will be appropriate? 

2. Assume no other reinsurance was used by ABC insurance company. What will be the impact on ABC insurance company’s income statement and leverage ratios (i.e., gross premium to surplus, and net premium to surplus) if your proposed reinsurance is adopted? 

3. If ABC insurance company would like to further limit its net exposure for its retention under your proposed reinsurance in 6.1, what would be a viable option?