Question:

A small general insurance company (A) writing only property business cedes a quota share reinsurance arrangement to a reinsurance company (B). The treaty cedes 40% of the protected portfolio. A pays 25% commission to acquire the business and has internal expenses of 7.5%. A expects to write £10m of business at a loss ratio of 65%. B bears the ceded proportion of A's acquisition costs and expenses. B's own expenses are 2% of gross premium received by B and B pays the broker 2.5% for the business.

a) Determine B's expected profit on this treaty, stating any assumptions that you make.

b) As a pricing actuary for B you have been shown this treaty by an underwriter. Explain what changes to the treaty you might suggest to the underwriter before the terms are agreed.