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Chapter 6 Reinsurance programmes 6/3

In arranging its reinsurance programme, an insurer may seek to achieve a number of objectives,
An insurer may seek
including: to achieve a number
of objectives

automatic
reinsurance
cover

security and adequate
continuity capacity

Insurer’s
objectives

economic appropriate
advantage retention

sufficient
scope

Let us examine each of these objectives in turn.
Automatic reinsurance cover
Whether the insurer requires proportional cover depends on whether it considers the benefits of such a
cover to outweigh the cost. A broad automatic cover would assist with underwriting capacity and ensure
that an insurer could provide cover for risks without having to seek its reinsurer’s approval first.
However, such a cover would take a proportion of the insurance premium and may not prove as Chapter
cost-effective as alternative products. Reference copy for CII Face to Face Training

Facultative reinsurance will usually remain an important part of an insurer’s protections, for example, to 6
provide extra capacity above treaty limits or for risks excluded by the programme. They are, however,
arranged on an individual ad hoc basis and form no part of the programme.
Adequate capacity
The insurer will seek to have a reinsurance product that provides a gross automatic capacity, which is
sufficiently large to enable it to accept most of the business offered, without needing to seek the prior
agreement of the reinsurers. However, the amount of automatic capacity obtainable will typically be
influenced by the size of the insurer.

Be aware
It would be unusual for an insurer with capital of £50m and annual premiums of £100m to have the same automatic
capacity as that of another insurer 20 times larger.

The capacity of the cover will also reflect the size and nature of the risks which the insurer transacts, as
Capacity of the cover
differences may exist between property and liability risks. In addition, the basis of estimating the risk, will also reflect the
such as the insurer’s sum insured or estimated maximum loss (EML) is important, since this will size and nature of
the risks
determine the maximum loss which the insurer is likely to suffer and, accordingly, the amount of
reinsurance required. The EML may be considerably less than the sum insured but calculation of this
figure for any risk is difficult since so many imponderables need to be taken into account.

In relation to capacity, the insurer also needs to consider the possibility of aggregations or
accumulations of risks exposed in a particular area to a natural peril, such as earthquake, and the
associated possible maximum loss.
Appropriate retention
The insurer will set its retentions on a per risk, per occurrence and aggregate basis in accordance with its
retention strategy, its willingness to retain risk. The main factors considered are usually its level of
capital and reserves, the cost of reinsurance and smoothing of earnings fluctuations. Regard will also be
had to market norms and to various rules of thumb which suggest that the amount of the retention
should be within a particular range of percentages of capital or of premium income or some other
measure.