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Chapter 5 Features and operation of non-proportional reinsurance treaties 5/17

• Annual premium income over the past few years and estimated income for the coming year for the
business to be protected.
• Structure of the proportional and non-proportional reinsurance programme and, in particular, retention
limits.
• Historical loss experience of the insurance company.
• Structure of the portfolio to be protected (risk or loss profile).
Two different rating methods exist which are often combined to work out a quotation:

• Experience basis. In accordance with the experience, with projection into the future.
• Risk exposure basis. In accordance with the risk exposure.

C3 Detailed information required for rating non-proportional reinsurance

In addition to the basic information discussed in the last section, reinsurers require more detailed
information from insurers seeking excess of loss cover which is significant to the rating process:
• Original underwriting limits of the reinsured.
• The basis of these limits (sum insured or EML basis). If it is on an EML basis, the minimum factor that
is applicable must be provided.
Reinforce
Do you recall what is meant by EML? You should note that interestingly, the figure may well be less than either the
market value or the replacement value of the insured property. Chapter

• Claims experience. The number of years for which claims history is available depends upon the length 5
of time that the reinsured has been writing the particular class of business in question. For risk and
working covers, at least five years’ experience figures would usually be expected and this would be
considerably longer for catastrophe protections. The detail required consists of both the premium
income for each year as well as a profile of the amount and frequency of losses which would have
affected the cover. Any loss amounts should be defined as to whether they are before (‘from ground Reference copy for CII Face to Face Training
up’) or after the application of the proposed deductible. The pure burning cost can be calculated from
this information by expressing the losses that reinsurers would have been liable for as a percentage of
the premium income being protected. Although this provides a basic factor for assessing the potential
rate for the excess of loss cover, especially for low level and working covers, other considerations
need to be applied, as follows:
– Do the loss figures represent the anticipated final cost of the claims? This may not be such an issue
for property claims, but will be an important factor in liability classes of business where the cost of
the claim can increase over a period of years before its eventual settlement.
– Are there significant or noticeable fluctuations in the cost of claims from one year to another? This
may indicate an unbalanced portfolio as a result of the underwriting policy of the reinsured. The
reinsurer should try to understand the reasons for such fluctuations, possibly by comparing the loss
experience with that of similar treaties from the same area.
– What level of loading factor would be appropriate to allow a margin for expenses and profit? These
loading factors vary from risk to risk and class to class and are customarily expressed as ‘improper’
or ‘top heavy’ fractions, as follows:
Example 5.12
100 = 25% loading
a. 80th
100 = 33.33% loading
b. 75th
In a., the reinsurer believes that a loading factor of 25% is needed over and above the burning cost of claims.
This would have the effect of increasing, say, a burning cost premium of £800,000 to £1m.

In b., a 33.33% loading factor would have the effect of increasing the same burning cost premium from £800,000 to
£1,066,640.

The loading factor should also be sufficient to include claims arising before the reinsurer has been
able to build a fund to meet them and for the fact that the reinsurer is supporting the reinsured with its
capital and security.