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The following is an example of a dual trigger insurance contract with a provision that adjusts the retention amount downward based on the performance of a specified equity index. Please fill in the missing values in the table.
The insurer enters into an insurance contract with the insured (NPTW) to indemnify NPTW for certain insured losses in excess of defined retention. The intent of the coverage is to protect NPTW from significant or catastrophic property-casualty losses. The coverage would include a retention amount that would be adjusted downward according to a scale tied to the Dow Jones Industrial Average (DJIA). If a catastrophic loss occurs, NPTW would likely have to liquidate some of its investment holdings (bonds or equities) to pay its losses, which exposes NPTW to significant investment risk in a down market. The adjustment feature provides protection against investment risk by allowing NPTW to recover more losses in a declining investment market.
Coverage: Property Losses
- Period: 1/1/2019 through 12/31/2019
- Retention: $10 million per occurrence, adjusted downward in the same percentage as period-to-date (from 1/1/2019 to measurement date) decreases in the DJIA, not to exceed 50%. No upward adjustments.
- Limit: $15 million per occurrence, $15 million per annum
- Premium: $1.4 million per annum
Both of the following scenarios assume that the DJIA on 1/1/2019 was 24,000. Please fill in the retention amounts and recovery under the insurance contract for each scenario.