Page 129 - M97TB9_2018-19_[low-res]_F2F_Neat2

Chapter 5 Features and operation of non-proportional reinsurance treaties 5/23

Key points

The main ideas covered by this chapter can be summarised as follows:
Main features and operation of non-proportional reinsurance
• Non-proportional reinsurance was developed to deal with the protection of retained aggregate exposures on the
account of the ceding insurer after the operation of proportional reinsurance.
• The balance of any loss which exceeds an agreed limit will be met by the reinsurer, usually up to a contractual
maximum.
• Non-proportional reinsurance distributes liability between the reinsured and the reinsurer on the basis of losses
rather than sums insured.
• Excess of loss exposures to reinsurers are not determined risk by risk unlike in proportional reinsurance.
• Excess of loss contracts are used to deal with:
– losses on large single risks that fall outside the scope of existing proportional arrangements; and
– losses arising on a number of original risks at the same time, all resulting from one occurrence or event.
• Proportional reinsurances may be used if the reinsured does not want restrictions to the amount of risk cover that
may be applied; excess of loss reinsurance can be used as an adjunct.
• The reinsured may have concerns over accumulation of losses arising out of one event and excess of loss
reinsurance can be used to protect the overall net retained liability under the proportional treaty.
• A ‘per risk’ excess of loss treaty protects against a loss occurring on an individual original policy which exceeds a
monetary amount which the reinsured is prepared to retain.
• Common account protection benefits both the reinsured and its proportional reinsurers. Chapter
• A catastrophe or ‘per event’ contract sets out to provide cover for the reinsured irrespective of the number of 5
possible risks affected by an accumulation of losses arising out of one event or occurrence. Alternatively, it may
protect 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 any catastrophic event.
• Otherwise known as ‘excess of loss ratio’, stop loss treaties reinsure aggregate losses from a specific class of
business rather than individual losses or aggregations caused by an event or occurrence, and apply after all other
prior reinsurances have been taken into account. Reference copy for CII Face to Face Training
• Cover is described as a percentage of losses exceeding the ceding insurer’s GNRPI, where GNRPI is the reinsured’s
premium income for the duration of the cover.
• Stop loss treaties may require the insurer to contribute to the reinsurer’s losses by imposing a co-insurance clause.
• Unlike stop loss which operates on pre-agreed percentages, aggregate excess of loss treaties have limits expressed
as fixed amounts.
• An aggregate of losses is covered beyond an excess point to an upper limit, resulting from a single event or defined
peril, over a specified period.
• Clash excess of loss provides protection in situations where a single event impacts on two or more classes of
business and covers the aggregation resulting from one identifiable loss event. It provides protection against an
accumulation of net losses across a number of accounts once all of its more specific reinsurances have been used
in the separate accounts.
• Umbrella excess of loss protects the reinsured in the event of the exhaustion of some or all of its excess of loss
contracts, and sits above the covers put in place for a number of classes. It is a single composite excess of loss
cover that protects the insurer against an accumulation of losses in excess of its specific underlying policy limits.
• Buffer excess of loss is effected at a low level within an account, and responds to identified loss causes only, for
example, all marine hull own damage losses forming part of a combined marine and aviation hull own damage
programme.
• Back-up covers, where cover would operate in the event that the original reinsurance exhausts the defined number
of reinstatements and the reinsured requires further cover to protect the account.
• Reinstatement premium protections indemnify the reinsured for payment of reinstatement premiums as a result of a
loss (or losses) which has affected a particular programme
• Top and drop and cascade protections, act as additional cover that ‘drops down’ to provide further protection on
lower layers if those limits and their reinstatements have been exhausted by claims; this protection makes good use
of unexhausted cover within higher upper layers.