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5/24 M97/February 2018 Reinsurance

Different bases of cover attachment
• RAD (or policies issued and renewed) basis where reinsurers agree to assume liability for claims on risks or original
policies attaching during the period of the reinsurance.
• LOD basis where reinsurers agree to assume liability for losses occurring during the period of the reinsurance,
irrespective of the inception dates of the original policies giving rise to the claims.
• ‘Claims made’ or ‘losses discovered’ bases where reinsurers agree to assume liability for claims made or losses
discovered during the period of the reinsurance, irrespective of the inception dates of the original policies or the
date on which the loss occurred.
Premium calculation and claims recoveries in non-proportional reinsurance
• The rating process starts by gathering the following essential information:
– annual premium income;
– retention limits;
– historical loss experience;
– risk profile;
– original underwriting limits and the basis of those limits;
– claims experience;
– nature of the account;
– catastrophe perils;
– underlying protections;
– number of reinstatements; and
– amount of cover required.
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Chapter • Other factors include:
– the effect of inflation;
– currency fluctuations;
– the relationship with the insurer; and
– the quality of the business.
• The premium must be sufficient to cover:
– the risk premium; Reference copy for CII Face to Face Training
– random deviations in the claims experience;
– provision for catastrophe losses;
– provision for acquisition costs; and
– a profit margin.
• The resulting figure is converted into a rate per cent or per mille which is applied to the GNPI of the underlying
business covered, to produce a fixed or variable reinsurance premium.
Event limits
• Events are made up of one or more occurrences and influence how losses paid by insurers after storms or other
major catastrophes are aggregated for reinsurance coverage purposes.
• ‘Hours clauses’ or event limits act as ‘first loss’ limits and prevent the reinsurer having to pay an aggregate loss
amounting to several times the reinsurance cover following 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.

Reinstatements
• A reinstatement clause states how often a contract can incur losses by allowing the cover under the contract to be
automatically ‘reinstated’ should any portion of the cover be exhausted by a loss.
• There would be unlimited reinstatements of cover in the absence of any such restriction.
• 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 additional cover without
any further premium, while others may allow a combination of free reinstatements and those that attract additional
premium.
• Premiums can be calculated pro rata to the amount of the reinstatement needed with or without recognition of the
time left before the contract comes to an end.