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Bluth Insurance Company writes a property insurance contract on a skyscraper in California

Economics

Bluth Insurance Company writes a property insurance contract on a skyscraper in California. The policy has a $50 million limit. Bluth wants to cede some of this risk in a facultative reinsurance contract with Austero Re. They are considering their options.

1. One option is an excess-of-loss contract with a $10 million retention limit. If they went with this option and there was a fire in the skyscraper which caused $20 million of damage, how much would Austero Re pay?

2. Another option is a surplus-share contract with a $10 million retention limit. If they went with this option and there was a fire in the skyscraper which caused $20 million of damage, how much would Austero Re pay?

Option 1

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