Reinsurance and Risk Transfer

Introduction

Insurance transfers risk from policyholders to insurers; reinsurance transfers part of that assumed risk from an insurer, the cedant, to another insurer, the reinsurer. Reinsurance does not ordinarily alter the original insurer’s contractual obligation to its policyholder. If the reinsurer fails to pay, the insurer generally remains liable for the valid policy claim.

Reinsurance supports solvency, underwriting capacity, earnings stability and catastrophe management. It can also provide underwriting expertise, claims assistance and access to international capital. Nevertheless, it creates counterparty, basis, documentation and operational risks. Effective reinsurance therefore requires more than purchasing the cheapest available cover: the insurer must coordinate contract structures, retention levels, exclusions, limits and the order in which multiple protections apply.

Learning Objectives

After studying this chapter, students should be able to:

1. explain the economic and operational purposes of reinsurance;
2. compare facultative and treaty reinsurance;
3. calculate cessions and retentions under quota-share and surplus-share treaties;
4. calculate recoveries under excess-of-loss and stop-loss structures;
5. explain catastrophe programmes, attachment points, limits and reinstatements;
6. analyse how multiple contracts interact through their inuring order;
7. compare conventional reinsurance with alternative risk-transfer mechanisms; and
8. evaluate regulatory, governance and counterparty considerations.

1. The Reinsurance Relationship

A policyholder pays premium to an insurer in exchange for insurance protection. The insurer may then transfer part of its portfolio exposure to a reinsurer. The original insurance contract and the reinsurance contract are legally distinct.

The basic loss allocation identity is:

where:

• G = gross loss payable by the insurer before reinsurance, in currency units;
• C = total valid reinsurance recoveries, in the same currency;
• N = insurer’s net loss after reinsurance, in the same currency.

This identity is an accounting allocation, not a guarantee of collection. If a recovery is disputed or the reinsurer defaults, the economic loss retained by the insurer may exceed the contractual net amount.

Figure: Classification of outward reinsurance structures.

1.1 Principal purposes

Reinsurance is used to:

• increase capacity: permit underwriting of risks larger than the insurer could retain alone;
• protect solvency: limit loss severity from individual claims or catastrophes;
• stabilise results: reduce volatility across accounting periods;
• manage accumulations: control concentrations by location, peril or insured group;
• support growth: provide financing and capacity for a new line of business;
• obtain expertise: access specialist pricing, engineering or claims knowledge;
• facilitate withdrawal: reduce exposure to a portfolio being discontinued; and
• meet capital objectives: obtain eligible risk mitigation where regulation permits.

Reinsurance does not correct inadequate primary pricing, poor claims controls or unchecked accumulation. It reallocates specified consequences of risk; it does not eliminate the underlying hazard.

2. Facultative and Treaty Reinsurance

2.1 Facultative reinsurance

Facultative reinsurance is negotiated for an individual risk or policy. The cedant decides whether to offer the risk, and the reinsurer decides whether to accept it. Detailed underwriting information is normally supplied before acceptance.

It is useful for exceptionally large, hazardous or unusual risks; risks excluded from an existing treaty; and amounts exceeding treaty capacity. Its disadvantages include transaction cost, slower placement and uncertainty until acceptance is confirmed.

Facultative cover may be proportional, under which premiums and losses are shared, or non-proportional, under which the reinsurer responds above an agreed retention.

2.2 Treaty reinsurance

A treaty automatically covers a defined class or portfolio, subject to its wording. The cedant must cede and the reinsurer must accept eligible business within the treaty’s scope. Automatic coverage reduces administrative cost and placement delay, but precise portfolio reporting and contractual boundaries are essential.

A facultative-obligatory arrangement is a hybrid: the cedant may choose what to cede, while the reinsurer must accept qualifying cessions. Because this can produce adverse selection, reinsurers usually impose strict controls.

3. Proportional Reinsurance

Under proportional reinsurance, premium and covered losses are shared in an agreed proportion. The reinsurer commonly pays a ceding commission to reimburse part of the cedant’s acquisition and administration costs. A profit commission may return part of favourable treaty experience to the cedant.

3.1 Quota-share treaty

Under quota share, a fixed proportion q of every eligible risk is ceded, where 0 ≤ q ≤ 1. For covered premium P and covered loss L:

Here P_c is ceded premium, L_c is ceded loss and L_n is the cedant’s net loss. All monetary quantities must use the same currency and valuation basis.

Worked example. An insurer writes an eligible policy with premium CU 400,000 and incurs a covered loss of CU 3,000,000. Under a 40% quota-share treaty:

• ceded premium = 0.40 × 400,000 = CU 160,000;
• reinsurer’s loss = 0.40 × 3,000,000 = CU 1,200,000;
• insurer’s net loss = 0.60 × 3,000,000 = CU 1,800,000.

If the ceding commission is 25% of ceded premium, the commission is CU 40,000. This commission does not change the loss allocation.

Quota share is simple and capital-efficient, but it transfers the same percentage of small and large risks. The cedant may therefore surrender profitable premium that it could safely retain.

3.2 Surplus-share treaty

A surplus-share treaty allows the insurer to retain a fixed monetary line on each risk and cede the excess sum insured, up to a stated number of treaty lines. Losses and premiums are then shared according to the proportions of sum insured retained and ceded.

Let:

• B = treaty subject sum insured after any prior facultative placement;
• R = cedant’s retained line;
• m = number of surplus lines provided by the treaty;
• S_c = ceded sum insured.

Assuming the risk is eligible and the treaty uses sum insured as its allocation basis:

For B > 0, the ceded proportion is:

The covered loss is allocated in the same proportion: L_c=sL and L_n=(1-s)L. Any amount above total capacity (m+1)R remains with the cedant unless protected elsewhere.

Worked example. A risk has a treaty subject sum insured of CU 50 million. The insurer retains CU 10 million, and the treaty provides three surplus lines, or CU 30 million of capacity.

The treaty cedes 60% of the risk. The remaining 40%, equal to CU 20 million of sum insured, consists of the CU 10 million intended line plus CU 10 million above treaty capacity. For a CU 15 million covered loss, the treaty pays CU 9 million and the insurer retains CU 6 million.

Surplus share preserves more small-risk premium than quota share, but administration is more complex and the result depends on accurate insured values.

4. Non-Proportional Reinsurance

Non-proportional reinsurance responds when a defined loss measure exceeds an attachment point. Premium is separately priced rather than shared in the same ratio as original premiums.

4.1 Excess-of-loss recovery

For a single layer, let:

• L = covered loss measured under the contract;
• A = attachment point or deductible;
• U = layer limit.

The contractual recovery, before reinstatement premiums, exclusions or counterparty default, is:

The layer is described as U excess of A. All three values must be measured on the same basis—for example, per risk, per occurrence or annual aggregate.

For CU 8 million excess of CU 2 million:

• a CU 1.5 million loss produces no recovery;
• a CU 6 million loss produces CU 4 million recovery;
• a CU 14 million loss produces the maximum CU 8 million recovery.

The cedant still bears CU 6 million in the last case: CU 2 million below attachment plus CU 4 million above the exhausted layer.

4.2 Principal forms

Per-risk excess of loss applies separately to each insured risk. It protects against severe individual losses, such as a major industrial fire.

Per-occurrence catastrophe excess of loss aggregates covered losses arising from one defined occurrence. It protects against events such as earthquakes, hurricanes or floods affecting many policies.

Aggregate excess of loss or stop loss responds to cumulative losses over a specified period. If L_a is annual aggregate covered loss, A_a the annual attachment and U_a the annual limit:

Attachments may be stated as currency or as a percentage of a defined premium measure. A percentage attachment must be converted using the premium base specified in the contract.

Worked example. Annual covered losses are CU 72 million. A stop-loss treaty covers CU 20 million excess of CU 55 million. Recovery is:

The insurer’s net covered loss is CU 55 million. Had aggregate losses been CU 82 million, recovery would have been capped at CU 20 million, leaving CU 62 million net.

5. Retention, Cession and Programme Design

Retention is the portion of risk kept by the cedant. Cession is the portion contractually transferred to a reinsurer. A higher retention normally reduces reinsurance premium but increases earnings volatility and capital exposure.

Retention decisions should consider:

• available capital and regulatory solvency requirements;
• risk appetite and target probability of ruin;
• expected loss, tail loss and earnings volatility;
• portfolio diversification and catastrophe concentration;
• reinsurance price and counterparty credit quality;
• liquidity required before recoveries are collected; and
• strategic capacity needed for underwriting growth.

Insurers use catastrophe models, scenario analysis and metrics such as value at risk and expected shortfall. A model output is not automatically an appropriate retention: management must consider model uncertainty, omitted perils and non-modelled operational effects.

5.1 Layering

A programme may contain several adjacent layers. For example:

• insurer retains the first CU 5 million;
• Layer 1 covers CU 10 million excess of CU 5 million;
• Layer 2 covers CU 25 million excess of CU 15 million.

For a CU 32 million covered occurrence, Layer 1 pays CU 10 million and Layer 2 pays CU 17 million. The insurer retains CU 5 million. For a CU 45 million loss, both layers are exhausted and the insurer retains CU 10 million: CU 5 million below the programme and CU 5 million above its CU 40 million upper boundary.

5.2 Inuring order

The inuring order specifies how one reinsurance contract affects the loss presented to another. Facultative and proportional covers often inure first, so catastrophe cover applies to the cedant’s net retained occurrence loss. However, contract wording can establish another order.

The order materially affects recoveries. Analysts must therefore identify:

1. the original gross loss;
2. the subject business of each contract;
3. exclusions and event definitions;
4. the allocation under earlier-inuring covers;
5. the loss presented to each later layer; and
6. limits, aggregates and reinstatements.

Recoveries should never be added independently if the contracts apply sequentially.

6. Catastrophe Protection

A catastrophe can generate many correlated claims simultaneously. Catastrophe excess-of-loss treaties commonly use an occurrence definition and an hours clause, which aggregates qualifying losses during a specified period. Different periods may apply to windstorm, earthquake, flood or civil unrest.

A programme may include several layers and one or more reinstatements. A reinstatement restores exhausted layer capacity after an event, usually in exchange for additional premium. Whether reinstatement premium is proportional to the amount and time reinstated depends on the contract.

Catastrophe programme design must examine:

• geographical and peril accumulations;
• event definition and hours clauses;
• demand surge and claims inflation;
• multiple-event years;
• exclusions and coverage gaps;
• aggregate deductibles or limits;
• reinsurer credit concentration; and
• the liquidity timing of recoveries.

Basis risk arises when the protection’s payment differs from the cedant’s actual loss. It is especially relevant to index-triggered instruments but can also arise from restrictive conventional wording.

7. Life Reinsurance

Life reinsurance addresses mortality, longevity, morbidity, lapse and financing risks. Common structures include:

• yearly renewable term (YRT): the reinsurer covers an agreed portion of mortality risk, often based on net amount at risk;
• coinsurance: the reinsurer shares premiums, benefits, expenses and reserves under agreed terms;
• modified coinsurance: policy reserves remain legally or economically with the cedant while experience is shared contractually;
• catastrophe mortality cover: protection against concentrated deaths from a defined event; and
• longevity reinsurance: protection against annuitants living longer than expected.

For a conventional level-benefit policy, net amount at risk is often approximated by death benefit minus the relevant policy reserve. This is not universal: the applicable definition must follow the product and treaty wording.

Life treaties also require attention to recapture rights, underwriting standards, claims practices, lapse experience and the long duration of reinsurer credit exposure.

8. Alternative Risk Transfer

Alternative risk transfer (ART) uses capital-market, corporate or hybrid structures to supplement conventional insurance and reinsurance.

8.1 Captives

A captive insurer is owned by the organisation or group whose risks it primarily insures. Captives can centralise risk financing, retain predictable losses and purchase wholesale reinsurance. They require adequate capital, governance, actuarial pricing and genuine risk transfer; they should not be used merely to obtain accounting or tax outcomes without economic substance.

8.2 Risk-retention groups

A risk-retention group (RRG) is a member-owned liability insurance vehicle used by businesses or professionals with similar exposures. In the United States, RRGs operate under a specific federal statutory framework while being chartered in one state. Unlike a single-parent captive, an RRG pools liability risks among multiple member-owners. Its permitted business, licensing and consumer protections depend on the applicable jurisdiction; the model should not be assumed to exist identically in every country.

8.3 Catastrophe bonds

A catastrophe bond transfers specified catastrophe risk to investors through a special-purpose vehicle. Investors provide collateral and receive a risk premium. If the defined trigger occurs, some or all principal is used to meet the sponsor’s obligation; otherwise, principal is returned at maturity.

Triggers may be:

• indemnity: based on the sponsor’s actual covered losses;
• industry loss: based on an independent industry loss index;
• parametric: based on physical measurements such as wind speed or earthquake magnitude; or
• modelled loss: based on event parameters applied to a predefined exposure model.

Indemnity triggers usually minimise basis risk but may take longer to settle and disclose more exposure information. Parametric triggers settle quickly but can produce a payment materially different from actual loss.

8.4 Other mechanisms

• Industry-loss warranties: pay when an industry loss threshold, and often a sponsor loss condition, is met.
• Collateralised reinsurance: obligations are supported by assets placed in trust or another collateral arrangement.
• Sidecars: special-purpose vehicles accept a defined share of an insurer’s or reinsurer’s portfolio.
• Insurance-linked securities funds: pool investor capital across insurance risks.
• Finite-risk arrangements: combine limited risk transfer with financing across time. Regulators scrutinise whether significant insurance risk has genuinely transferred.
• Parametric insurance or reinsurance: pays according to a measurable trigger rather than adjusted indemnity loss.

ART can provide multi-year capacity and diversify sources of capital, but introduces basis risk, structuring costs, collateral management and trigger-model risk.

9. Illustrative Integrated Case: Meridian Assurance

Background

Meridian Assurance is a fictional property insurer. It covers a coastal manufacturing plant for CU 60 million. A hurricane causes a covered property loss of CU 30 million.

Programme terms and inuring order

The contracts state the following unambiguously:

1. A facultative proportional placement covers 25% of the original policy. It inures first and is excluded from the surplus treaty’s subject business.
2. After the facultative placement, the surplus treaty applies to the remaining 75% share. Meridian retains one line of CU 15 million, and the treaty provides two surplus lines, or CU 30 million.
3. A catastrophe treaty covers CU 20 million excess of CU 5 million per occurrence. It applies to Meridian’s net retained occurrence loss after the facultative and surplus-share recoveries.
4. The hurricane is one covered occurrence. There are no other event losses, exclusions, deductibles, aggregate erosion, reinstatement charges or collectability problems.

Analysis

Step 1: Facultative allocation.

The facultative reinsurer covers 25% of the CU 60 million policy and therefore 25% of the CU 30 million loss:

The sum insured remaining for the surplus treaty is CU 45 million, and its associated loss is CU 22.5 million.

Step 2: Surplus-share allocation.

The surplus treaty has capacity of two lines × CU 15 million = CU 30 million. On the CU 45 million treaty subject amount, the ceded proportion is:

The surplus recovery is:

Meridian’s loss after the earlier-inuring proportional covers is:

Step 3: Catastrophe recovery.

The catastrophe treaty receives the CU 7.5 million net occurrence loss. Its recovery is:

Step 4: Final net loss.

The result reconciles as follows:

Outcome and learning points

Meridian’s final net loss is CU 5 million, not CU 7.5 million. CU 7.5 million is only the intermediate loss after facultative and surplus protection. The case demonstrates that a valid programme calculation requires explicit subject business, proportions, limits and inuring order. If the catastrophe cover applied before proportional reinsurance, or if facultative business were included in the surplus treaty, the allocation could differ and might create overlap or dispute.

10. Pricing, Security and Performance Evaluation

Reinsurance pricing reflects expected loss, uncertainty, expenses, cost of capital and market conditions. For catastrophe layers, historical burning cost alone may be unreliable because events are infrequent and exposures change. Exposure models and catastrophe simulations are therefore commonly used, while recognising model uncertainty.

Useful performance measures include:

• ceded loss ratio: ceded incurred losses divided by ceded earned premium;
• rate on line: reinsurance premium divided by layer limit;
• payback period: layer limit divided by annual premium, interpreted cautiously;
• recovery efficiency: actual or modelled recoveries relative to programme cost; and
• counterparty concentration: exposure to individual reinsurers or correlated groups.

Rate on line is a price indicator, not an expected loss probability. Two layers with the same rate on line may have different attachment probabilities, expected severities and contract conditions.

Reinsurer security assessment should consider financial strength, capital, liquidity, reserving, retrocession, collateral, jurisdiction, claims reputation and concentration. Diversification across weak counterparties is not a substitute for quality.

11. Regulation, Accounting, Ethics and Governance

Regulators generally grant capital credit only when risk transfer is effective, contracts are legally enforceable and counterparties or collateral satisfy prescribed standards. Supervisors may require stress testing, concentration reporting and controls over recoverables.

Under IFRS 17, reinsurance contracts held are accounted for separately from underlying insurance contracts. Expected recoveries do not simply cancel underlying insurance liabilities, and timing or measurement differences may remain. Detailed accounting treatment depends on contract terms and applicable standards.

Ethical and governance concerns include:

• presenting financing as reinsurance when significant insurance risk has not transferred;
• withholding material exposure information from reinsurers;
• manipulating claims allocation among treaties;
• purchasing cover from related entities on non-arm’s-length terms;
• allowing commission incentives to override policyholder security; and
• relying on optimistic catastrophe models without disclosing uncertainty.

Boards should approve reinsurance strategy and risk appetite. Management should maintain contract certainty, verify authorised signatures, monitor accumulations and collectability, and reconcile ceded balances. Claims, underwriting, actuarial, finance and legal teams should review wording together.

12. Technology and Contemporary Developments

Exposure databases, geospatial analytics and catastrophe models allow insurers to map accumulations and test programme structures. Artificial intelligence can help identify coding errors, compare clauses and flag unusual claims patterns. However, automated systems may reproduce poor data, overlook legal context or create false precision. Human validation and model governance remain essential.

Contemporary developments include growth in cyber reinsurance, climate-related modelling, parametric covers, collateralised capacity and insurance-linked securities. Cyber risk presents particular aggregation problems because one software vulnerability or service-provider outage can affect many insureds simultaneously. Climate change challenges models based on stationary historical frequencies, increasing the importance of forward-looking scenarios and transparent uncertainty ranges.

13. Managerial Best Practices

A sound reinsurance process should:

1. begin with portfolio risk and capital objectives rather than available products;
2. maintain accurate sums insured, locations and policy conditions;
3. model both probable and severe stress scenarios;
4. document the inuring order of every programme component;
5. test exclusions, hours clauses, aggregates and reinstatements;
6. assess reinsurer credit quality and liquidity timing;
7. compare conventional and alternative capacity on a consistent basis;
8. perform pre-renewal and post-event recovery simulations; and
9. ensure that accounting treatment follows economic substance and contract wording.

Chapter Summary

Reinsurance transfers specified insurance risk from a cedant to a reinsurer while normally leaving the cedant fully responsible to policyholders. Facultative reinsurance is individually negotiated; treaty reinsurance automatically covers a defined portfolio. Proportional treaties share premiums and losses, with quota share using a fixed percentage and surplus share using retained and ceded lines. Non-proportional treaties respond above attachment points and include per-risk, catastrophe and aggregate structures.

Retention determines the risk kept by the insurer, while cession determines the portion transferred. Programme effectiveness depends on limits, occurrence definitions, reinstatements, exclusions and, critically, inuring order. Catastrophe protection manages correlated event losses, while life reinsurance addresses mortality, longevity and related risks. Captives, risk-retention groups, catastrophe bonds, sidecars and collateralised reinsurance broaden the available risk-financing market. Sound governance requires genuine risk transfer, reliable data, contract certainty, counterparty assessment and transparent recognition of model and basis risk.

Key Terms

Attachment point: Loss level above which a non-proportional cover begins to respond.

Basis risk: Risk that a protection payment differs from the sponsor’s actual loss.

Catastrophe bond: Security that exposes investor principal to a specified insurance event.

Ceding commission: Payment by a reinsurer toward the cedant’s acquisition and administration costs.

Cedant: Insurer that transfers risk through reinsurance.

Cession: Portion of risk or premium transferred to a reinsurer.

Excess of loss: Cover that pays eligible losses above an attachment point, subject to a limit.

Facultative reinsurance: Reinsurance individually negotiated for a particular risk.

Hours clause: Provision defining the time period during which losses may be aggregated as one occurrence.

Inuring order: Contractual sequence in which multiple reinsurance covers apply.

Layer limit: Maximum amount recoverable from an excess-of-loss layer.

Quota share: Proportional treaty ceding a fixed percentage of eligible business.

Reinstatement: Restoration of exhausted reinsurance capacity, often for additional premium.

Retention: Portion of risk kept by the cedant.

Risk-retention group: Member-owned liability insurer serving businesses or professionals with similar exposures under an applicable statutory framework.

Stop loss: Aggregate cover protecting results above a specified loss threshold.

Surplus share: Proportional treaty that cedes sums insured above a retained line, subject to capacity.

Treaty reinsurance: Automatic reinsurance for a contractually defined portfolio.

Review Questions

Short Answer Questions

1. Distinguish the original insurance contract from the reinsurance contract.
2. State two differences between facultative and treaty reinsurance.
3. Define attachment point and layer limit.
4. What is an hours clause?
5. Why does parametric protection create basis risk?

Long Answer Questions

1. Compare quota-share and surplus-share reinsurance, including their advantages and limitations.
2. Explain the major forms of non-proportional reinsurance and their appropriate uses.
3. Discuss the factors an insurer should consider when selecting its retention.
4. Evaluate catastrophe bonds as an alternative to conventional catastrophe reinsurance.
5. Discuss the regulatory, accounting and ethical issues associated with reinsurance.

Analytical / Application Questions

1. An insurer has a 30% quota-share treaty and a CU 12 million excess of CU 4 million catastrophe layer that inures after quota share. Calculate the recoveries and final net loss for a CU 20 million covered occurrence.
2. A surplus treaty has a CU 8 million retained line and four surplus lines. Analyse the allocation of a CU 50 million risk and a CU 10 million proportional loss.
3. Design a reinsurance programme for a rapidly growing regional property insurer. Explain the proposed retention, proportional protection, catastrophe layers and counterparty controls.

Multiple Choice Questions with Answers

Question 1

Which statement correctly describes facultative reinsurance?

A. It automatically covers every risk in a defined portfolio.

B. It is separately negotiated for an individual risk.

C. It can only be written on a proportional basis.

D. It removes the insurer’s liability to the policyholder.

Correct Answer: B. It is separately negotiated for an individual risk.

Question 2

An eligible policy incurs a covered loss of CU 5 million under a 40% quota-share treaty. What is the insurer’s net loss before any other reinsurance?

A. CU 1 million

B. CU 2 million

C. CU 3 million

D. CU 5 million

Correct Answer: C. CU 3 million

Question 3

A surplus-share treaty has a retained line of CU 10 million and three surplus lines. What is the treaty’s maximum ceded sum insured per risk?

A. CU 10 million

B. CU 20 million

C. CU 30 million

D. CU 40 million

Correct Answer: C. CU 30 million

Question 4

A layer provides CU 8 million excess of CU 2 million. What is the recovery for a CU 7 million covered loss?

A. CU 2 million

B. CU 5 million

C. CU 7 million

D. CU 8 million

Correct Answer: B. CU 5 million

Question 5

Annual covered losses are CU 70 million under a stop-loss treaty of CU 15 million excess of CU 60 million. What is the recovery?

A. CU 10 million

B. CU 15 million

C. CU 55 million

D. CU 60 million

Correct Answer: A. CU 10 million

Question 6

What does the inuring order determine?

A. The sequence in which multiple reinsurance covers affect a loss

B. The order in which policyholders report claims

C. The ranking of reinsurers by financial strength

D. The sequence in which insurance licences are issued

Correct Answer: A. The sequence in which multiple reinsurance covers affect a loss

Question 7

Which catastrophe-bond trigger is based directly on physical event measurements such as wind speed?

A. Indemnity trigger

B. Parametric trigger

C. Accounting trigger

D. Premium trigger

Correct Answer: B. Parametric trigger

Question 8

Which statement best distinguishes a risk-retention group from a single-parent captive?

A. A risk-retention group cannot insure liability risks.

B. A risk-retention group pools similar liability risks among member-owners.

C. A risk-retention group is always a conventional reinsurer.

D. A risk-retention group eliminates the need for capital.

Correct Answer: B. A risk-retention group pools similar liability risks among member-owners.

Question 9

In the Meridian case, what loss was presented to the catastrophe treaty after facultative and surplus-share recoveries?

A. CU 5 million

B. CU 7.5 million

C. CU 15 million

D. CU 22.5 million

Correct Answer: B. CU 7.5 million

Question 10

In the Meridian case, what was the insurer’s final net loss after all three covers applied?

A. CU 2.5 million

B. CU 5 million

C. CU 7.5 million

D. CU 10 million

Correct Answer: B. CU 5 million