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5/8 M97/February 2018 Reinsurance

Figure 5.1: Common account protection

Common account protection

Insurer retains Insurer cedes

0% 60% 100%

A similar arrangement may apply where the insurer has an existing facultative reinsurance for a specific
risk. The premiums for the common account cover would most likely be shared between the insurer and
its reinsurer in accordance with their respective interests in the treaty. In example 5.6, the quota share
treaty reinsurer receives 40% of all original premiums ceded to the treaty and pays for 40% of the
common account cover. Recovery of losses exceeding the common account deductible would usually be
paid to the original insurer, i.e. the reinsured arranging the cover for itself and its quota share reinsurer,
which would then reimburse the quota share reinsurer with its 40% of the recovery.

Be aware
The excess of loss protection may be an option or compulsory feature of the treaty arrangements. In either case, the
reinsurance would be placed in a similar manner to net account protections and would, in effect, reinsure the
company’s gross account.

5 Catastrophe or per event
Chapter Where the insurer tries to limit the loss per event by means of excess of loss, it is then interested in an

actual ‘per event cover’. This provides it with claims settlement irrespective of the number of possible
risks affected by the loss.
Alternatively, a catastrophe excess of loss treaty provides protection for the reinsured where one
catastrophic event causes losses on various original insurance policies which, in total, exceed the
amount the reinsured is prepared to retain on each and every catastrophic event. This protects the
reinsured from an accumulation of its retentions on original risks after the application of any prior per Reference copy for CII Face to Face Training
risk reinsurance on a proportional or non-proportional basis.
Whether the insurer arranges a per risk or a per event excess of loss makes a considerable difference,
especially for classes of business with a significant accumulation potential.

Question 5.3

Refer back to the example 5.5. Assuming that the cover had been placed as per event cover rather than on a per risk
basis, if the losses had arisen from one event how many deductibles would the insurer have borne?

It would be wrong, however, to assume that the insurer always receives a greater contribution to
comparable losses from the reinsurer with a per event cover than with a per risk cover. Example 5.7,
which is based on the example referred to in question 5.3, shows that a per risk cover can also lead to
higher contributions to losses from the reinsurer. This is because where a sufficient number of large
risks are affected by sufficiently large losses from one and the same event, the insurer with a WXL/E
cover in fact runs the risk of having bought insufficient reinsurance cover. To illustrate this point we have
added a third loss to those already considered in that example.