Questions: Primary Insurer has an aggregate excess of loss treaty with Reinsurer. The treaty contains an internal limit of 4 million in excess of an internal retention of 1 million for each loss occurrence, subject to an outside retention of 6 million. The three losses listed below are subject to the treaty. Assuming the reinsurer pays 100% of the eligible losses, how much will Primary recover under the treaty? Loss Amount 1 5 million 2 3 million 3 2 million Select one: A. 0 B. 1 million C. 2 million D. 3 million

Solution Steps

For each loss, calculate the excess loss over the internal retention of \( \$1,000,000 \):

• For Loss 1: \( 5,000,000 - 1,000,000 = 4,000,000 \)
• For Loss 2: \( 3,000,000 - 1,000,000 = 2,000,000 \)
• For Loss 3: \( 2,000,000 - 1,000,000 = 1,000,000 \)

Next, apply the internal limit of \( \$4,000,000 \) to the excess losses:

• For Loss 1: \( \min(4,000,000, 4,000,000) = 4,000,000 \)
• For Loss 2: \( \min(2,000,000, 4,000,000) = 2,000,000 \)
• For Loss 3: \( \min(1,000,000, 4,000,000) = 1,000,000 \)

Sum the recoveries from each loss: \[ \text{Total Recovery} = 4,000,000 + 2,000,000 + 1,000,000 = 7,000,000 \]

Finally, apply the outside retention of \( \$6,000,000 \): \[ \text{Final Recovery} = \max(0, 7,000,000 - 6,000,000) = 1,000,000 \]

Final Answer