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5/20 M97/February 2018 Reinsurance

Example 5.13
A newly established personal accident insurer buys reinsurance protection to protect its account along the following
lines: Sum insured retained for risk of death £50,000; per event cover obtained for £800,000 XS £200,000.
As the insurer is new, it may not be possible to estimate the predicted premium income at the outset. Reinsurers
might then ask for a flat premium of £25,000 and seek an additional adjustment at the end, dependent on the
business written.

Variable premiums are characterised by the fact that, by definition, they vary according to the loss
experience of the portfolio protected by the excess of loss.

Reinforce
Before you move on to the next section, make sure that you know the five components of a non-proportional
reinsurance premium.

D Event limits

An ‘event’ influences how losses paid by insurers after storms or other major catastrophes are
An event triggers
coverage under the aggregated for reinsurance coverage purposes. An event triggers coverage under the contract. Events are
contract made up of one or more occurrences. An occurrence is often equated with ‘accident’; however, some
policies define occurrence to include continuous or repeated exposure which results in bodily injury or
5 property damage neither expected nor intended by the insured.
Chapter D1 Significance of and importance in defining an event

One problem that reinsurers experienced with risk excess of loss reinsurance programmes was the
possibility that insurers could claim more than once for the same loss event which could seriously affect
the profitability of the treaty. For example, a hurricane could hit the outlying islands of the USA
mainland, such as Puerto Rico, and then proceed to the mainland states. Reference copy for CII Face to Face Training

D2 Effect of ‘event’ on aggregations

The reinsurance market has learnt from this and includes either limitation clauses, such as hours
clauses, or event limits. These act as ‘first loss’ limits; they prevent the reinsurer from being called upon
to pay an aggregate loss amounting to several times the reinsurance cover due to a series of individual
risks being involved in losses caused by one event. Some reinsurers allow the ‘fallback’ or amount
greater than the event limit to be added to the reinsured’s net retained loss for the purposes of any
recovery from its catastrophe excess of loss programme.

D3 Effect of ‘event’ on reinsurance recoveries

Example 5.14 illustrates the effect that events and event limits have on reinsurance recoveries.
Example 5.14
In a property account risk excess treaty for £200,000 XS £50,000, an event limit of £600,000 (i.e. three total losses)
might be imposed. If four houses were hit by a storm, each loss being over the £250,000 total insured limit, the
claim would be apportioned as follows:
Total gross claims 4 × £250,000 = £1m
Deductible retained by insurer 4 × £50,000 = £200,000
Risk excess of loss cover 4 × £200,000 = £800,000
As this exceeds the event limit:

Reinsurers only pay £600,000
with the insurer paying the remaining £200,000
This increases the insurer’s overall liability to £400,000 (£200,000 retention + £200,000 in excess of the
event limit)