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CS Professional · Banking and Insurance - Laws and Practice · Functions in Insurance and Compliance related thereto (Part I)

Kaveri Industries seeks fire cover of Rs 10 crore on its plant. The general insurer's net retention limit for this class is Rs 2 crore and the balance is ceded to reinsurers. What share of the sum insured is ceded, and why does the underwriter do this?

80 percent is ceded. The insurer keeps Rs 2 crore of Rs 10 crore, which is 20 percent, and passes Rs 8 crore to reinsurers. The purpose is to hold the insurer's net exposure within its retention capacity, not to follow any Council-fixed split.

  1. A20 percent, to increase the insurer's net exposure
  2. B80 percent, to keep net exposure within the insurer's retention capacityCorrect
  3. C80 percent, because the Insurance Council fixes the cession
  4. D50 percent, because cessions are always equal

Explanation

Retention Rs 2 crore out of Rs 10 crore is 20 percent, so ceded is Rs 8 crore which is 80 percent. Check: 2 + 8 = 10. Cession keeps net loss within capacity; it is not set by the Council, and 20 percent is the retained share, not the ceded share.

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