Explanation of 2016.Fall #16a
Could you explain in part iii), why is it that we can immediately invoke Method 1 to conclude that there is self-evident risk transfer under this contract?
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Could you explain in part iii), why is it that we can immediately invoke Method 1 to conclude that there is self-evident risk transfer under this contract?
Comments
As mentioned from the Wiki, we can invoke Method 1 to conclude that there is self-evident risk transfer under this contract for these reasons:
1. The potential loss to the reinsurer is much larger than the premium (which is only 5M) for the coverage provided
2. There are no risk limiting features (reinsurer has significant exposure to risk in case of adverse loss, the 300M over the 50M)