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6/4 M97/February 2018 Reinsurance

In many instances, the choice of retention level will be made by the underwriter of the account under
Choice of retention
level is usually made consideration who will use his or her skill and judgment, based on knowledge and experience of the
by the underwriter account, to balance the relationship between profits and stability rather than to reduce the risk that the
capital is exhausted, subject always to market conditions and to what is available at what cost. If
reinsurance is plentiful in a soft market, the insurer may be inclined to reduce the amount it retains,
and/or to buy more reinsurance.
Sufficient scope
The insurer requires a reinsurance programme that covers the business currently being written.

classes of
business covered
by the treaty

the need for the
treaty to give cover
for policies issued exclusions proposed
prior to its inception by the reinsurers
but still in force at
that date The insurer needs to
give consideration to:

6 provisions of the
Chapter business written in scope of the treaty Reference copy for CII Face to Face Training
the territorial
treaty regarding
foreign currencies

Economic advantage
Insurers are seeking an economic advantage when placing their reinsurance treaties. However,
Insurers are seeking
an economic reinsurers will refuse to agree to terms that are unlikely to result in a profit for them over a period
advantage of time.
If an insurer can obtain a rate of reinsurance commission on its proportional treaties that more than
covers the acquisition and administration expenses of the business ceded, the value to its net account
increases in proportion to the percentage of original premiums ceded in reinsurance.
Security and continuity
Insurers and reinsurers alike are interested in continuity. Insurers will prefer reinsurers that maintain
relationships with them even after a run of bad results and reinsurers would also identify clients with
which they can maintain a long-term relationship to the benefit of both parties. However, in the current
climate where financial returns have become increasingly important, this desire for continuity has
reduced in favour of price issues.
Insurers prefer to use reinsurers that have good security (this is usually indicated by a high rating, e.g.
Insurers prefer to use
reinsurers that have AA, by a ratings agency such as Standard & Poor’s) as these reinsurers can be expected to remain
good security solvent even in times of financial crisis and to have the ability to indemnify insurers when required, even
years after the currency of the reinsurance contract. Such a reinsurer must be convinced that the insurer
is worthy of its support and that the terms of the treaty or treaties are fair to both parties.
Good security is seldom the least expensive when considering excess of loss quotations, the most
generous in offering reinsurance commissions or the most liberal in deciding how many lines a new
surplus treaty should have. A prudent insurer will take these facts into consideration before deciding
which offers to accept.