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Estimation of Expected Reinsurance Recoveries Under Excess-of-Loss Contracts

Abstract

The study examines the estimation of expected reinsurance recoveries under excess-of-loss contracts, focusing on the application of actuarial techniques to determine the amount an insurer can expect to recover from a reinsurer when insured losses exceed an agreed retention level. Excess-of-loss reinsurance provides protection against large individual or aggregate losses and is an important mechanism for controlling insurance risk exposure. Accurate estimation of expected recoveries is therefore essential for effective reinsurance planning, claims management, and financial assessment. The study will investigate how expected reinsurance recoveries can be estimated under different excess-of-loss contract structures. It will examine the relationship between gross insurance losses, the insurer's retention level, the contract limit, and the amount recoverable from the reinsurer. The study will also assess how variations in loss experience and contract parameters influence expected reinsurance recoveries. The study will focus on actuarial loss models for estimating recoveries under excess-of-loss arrangements. Factors such as claim frequency, claim severity, retention levels, attachment points, reinsurance limits, and aggregate losses will be considered. Probability distributions may be applied to model individual losses, while aggregate loss techniques may be used to estimate total recoveries under different excess-of-loss scenarios. A quantitative research approach will be adopted for the study. Historical insurance claims data containing information on individual and aggregate losses will be analysed alongside relevant excess-of-loss contract parameters. Descriptive statistics, probability distribution analysis, actuarial loss models, and scenario analysis will be employed to estimate expected reinsurance recoveries. Different retention levels and contract limits may also be examined to determine their effects on expected recoveries. The study is expected to reveal that expected reinsurance recoveries are strongly influenced by the severity and frequency of insurance losses relative to the contract retention level. Higher claim severity is expected to generate greater recoveries where losses exceed the attachment point, while higher retention levels may reduce the amount recoverable from reinsurers. The findings may also indicate that changes in contract limits and loss distributions can produce significant differences in expected reinsurance recoveries. The findings are expected to provide useful information for actuaries and insurance companies in evaluating excess-of-loss reinsurance arrangements. The study may assist insurers in estimating potential recoveries, assessing retained loss exposure, determining appropriate reinsurance protection, and improving financial planning. It may also provide a basis for evaluating the adequacy of existing reinsurance structures under different claims experience and loss scenarios. The study concludes that accurate estimation of expected reinsurance recoveries is essential for understanding the financial protection provided by excess-of-loss contracts. It is therefore recommended that insurance companies regularly analyse their claims experience and apply appropriate actuarial loss models when estimating reinsurance recoveries. Effective estimation may contribute to improved reinsurance planning, loss management, claims-paying capacity, and overall insurance risk management.

Keywords: Expected reinsurance recoveries, excess-of-loss contracts, reinsurance, actuarial modelling, insurance losses, claim severity, claim frequency, retention level, attachment point, reinsurance limit, aggregate losses, loss distribution, retained losses, actuarial risk, reinsurance risk management.