Liability Insurance Company writes a substantial amount of commercial liability insurance. A large construction company requests RM100million of liability insurance to cover its business operations. Liability Insurance has a reinsurance contract with Bermuda Re that enables the coverage to be written immediately. Under the terms of the contract, Liability Insurance pays 25% of the losses and retains 25% of the premium. Bermuda Re pays 75% of the losses and receives 75% of the premium, less a ceding commission that is paid to Liability Insurance.

a) What type of reinsurance contract best describes the reinsurance arrangement that Liability Insurance has with Bermuda Re?

b) If a RM50 million covered loss occurs, how much will Bermuda Re have to pay? Explain your answer.

c) Why does Bermuda Re pay a ceding commission to Liability Insurance?