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Chapter 5 Features and operation of non-proportional reinsurance treaties 5/15

Provided the inception date of a policy falls within the period of the reinsurance contract in question, the
reinsurers on that contract will be liable for all claims arising from that policy.

B2 Losses occurring during (LOD) basis
On this basis, reinsurers agree to assume liability for claims occurring during the period of the
Reinsurers assume
reinsurance, irrespective of the inception dates of the original policies giving rise to the claims. liability for claims
occurring during
The date the loss occurs is the date of loss which must fall within the reinsurance policy period. The period of reinsurance
simplicity of this approach has great attraction for the parties, making it easy to understand and to
administer.
Importantly, the clause should also state how time (or dates) are to be defined (for example, ‘Local
Standard Time at the place where the loss occurs’) because the time in one place (or zone) will be
different in another part of the world. Greenwich Mean Time remains in common use.

B3 ‘Claims made’ and ‘losses discovered’
On this basis, reinsurers agree to assume liability for claims made or losses discovered during the
period of the reinsurance. The reinsurer’s exposure to loss is not therefore determined by the inception
date of the original policy or the date on which the loss occurred.

The reinsurance contract seeks to replicate the basis of the original insurance contract and tends to be Refer to chapter 11
for casualty
used for certain types of liability or casualty treaties. reinsurance Chapter

C Premium calculation for non-proportional reinsurance 5

Here we provide a general guide to the calculation of premium under a non-proportional treaty account.
However, it should be noted that these are general principles only and different reinsurers use different
methods and apply different values to the rating factors considered.

In the case of proportional reinsurance, the premium income means the original premiums received by Reference copy for CII Face to Face Training
Premium income
the ceding insurer, a proportion of which are passed, i.e. ceded to the reinsurer. The premiums are means the original
usually gross, as written by the insurer, but occasionally they can be the original net premiums. We have premiums received by
the ceding insurer
seen in chapters 3 and 4 that the premiums for proportional reinsurance are calculated in proportion to
the amount of risk transferred so, for example, if 50% of the sum insured is to be ceded then the
reinsurer will receive 50% of the premium, from which – in most cases – an allowance is made to cover
the ceding insurer’s business acquisition costs.
In the case of non-proportional reinsurance, the reinsurers are seeking an appropriate premium for the
risk that is being transferred to them. The premium is usually expressed as a rate per cent or per mille
applied to the reinsured’s premium income base for the account being protected. Flat or in full premiums
are also used.

Question 5.6
Why is the proportional method of allocating premium to reinsurers inappropriate for non-proportional business?

The premium base can be defined in a number of ways. Table 5.1 shows a few of the most
common types.