FRM Part I · FRM Exam Part I · Operational Risk
A firm buys insurance to cover operational losses. Its expected annual operational loss is USD 12 million. The policy covers 70% of any single loss above a USD 5 million deductible, up to a maximum payout of USD 20 million per event. A single event causes a USD 25 million loss. What is the firm's net retained loss from this event?
The firm retains USD 11 million. The excess over the deductible is 20 million, the insurer pays 70% of that, or 14 million, below the cap, so the firm bears 25 minus 14, which equals 11 million.
- AUSD 5.0 million
- BUSD 11.0 millionCorrect
- CUSD 12.0 million
- DUSD 16.0 million
Explanation
Loss above the deductible is 25 - 5 = 20 million. The insurer pays 70% of 20 = 14 million, which is below the 20 million cap. Net retained loss = 25 - 14 = 11 million. Using 100% of the excess would give 5 million, which ignores the 70% coinsurance.
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