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Chapter 5 Features and operation of non-proportional reinsurance treaties 5/21

E Reinstatements

A reinstatement clause defines the number of times that a contract can incur losses. It allows the cover
Defines the number of
under the contract to be automatically ‘reinstated’ in the event that the limit or any portion of it is times that a contract
exhausted by a loss. Reinstatements are most frequently used on property covers. The purpose of the can incur losses
reinstatement condition is to limit the number of times the treaty cover may be utilised. Without a
reinstatement condition, there is no limit or, in other words, unlimited reinstatements.
Example 5.15 shows how a reinstatement clause might work:

Example 5.15
Catastrophe cover is purchased to protect the insurer’s retentions in its property account, of £2m XS £2m with one
reinstatement.
Three losses occur: an earthquake costing £2.35m, a hurricane causing losses of £3m and a fire causing a
loss of £4m.

For the first event, the reinsurer pays £350,000, reducing the cover from £2m to £1.65m. However, the cover is then
automatically reinstated.
For the second loss, the reinsurers pay £1m. The cover is reduced to £1m but again automatically reinstated to £2m
as the insurer has not yet used up its automatic reinstatement cover (having used £1m and £350,000 of the £2m
available).

When the fire loss is recovered, reinsurers pay £2m, exhausting the reinstatement and leaving £650,000 of cover
under the contract. Chapter
If a further loss of £3m occurred, the cover could only pay £650,000 before being totally exhausted and the insurer
would either have to retain the loss itself or seek cover from other reinsurances. 5

A reinstatement clause ‘reinstates’ the existing cover. Therefore, a reinsurance contract with five
reinstatements can cover up to six total losses.
Reinstatements may either be ‘paid’, ‘free’ or a combination of both: Reference copy for CII Face to Face Training
• If reinstatements are paid for, the reinstatement premiums are charged as an additional premium
which is based on a proportion of the original premium paid.
• Some reinsurance contracts allow the insurer to obtain additional cover without the payment of any
further premium. Liability contracts often include unlimited reinstatement at no additional premium.
• A treaty may combine the above by providing an initial reinstatement at no cost with later
reinstatement(s) subject to additional premium, but this is unusual.
If a reinstatement is subject to an additional premium, the reinstatement premium will be charged as
follows:
Cost of claim to cover × premium reinstatement premium=
Limit of reinsurance cover available

Some reinstatements are also made pro rata to time. However, reinstatement premiums are commonly
charged 100% to time.

Question 5.7
Apart from keeping the calculation process as simple as possible, why do you think reinsurers prefer to charge
100% to time, rather than pro rata to time?

Nevertheless, if ‘time’ is to be a charging factor this adds an additional factor into the formula as
follows:
Number of days from loss date to end of policy
Number of days in policy