Page 138 - M97TB9_2018-19_[low-res]_F2F_Neat2

6/6 M97/February 2018 Reinsurance

• Is the portfolio mixed evenly between property and casualty, or is there a bias towards one type?
• How quickly will claims be settled? Most proportional claims are settled periodically in arrears;
whereas, in non-proportional treaties, all claims are recovered from the reinsurer when they have been
paid by the insurer to the original insured. Cash loss provisions in proportional treaties will result in
quicker payment by the reinsurer.
• To what extent can the cover be ‘reinstated’? Proportional treaties usually cover all risks reinsured in
respect of each and every claim during the original policy or treaty period. This equates to the
provision of unlimited reinstatements without additional premium.
However, reinsurers are increasingly applying some form of restriction on the amount that they will pay
in respect of specific incidents or high loss ratios.

Question 6.2

How are reinsurers doing this?

Excess of loss treaties are restricted ‘horizontally’ in so far as the number of reinstatements is almost
always limited and usually subject to the payment of additional premium. These treaties are restricted
‘vertically’ because the cover of each layer is limited in amount, except when unlimited cover is given to
match the original policy as in the case of motor third party liability for bodily injury, in many territories.

Be aware
Most excess of loss treaties are also subject to limited reinstatements. This aspect is part of the overall costing of an
excess of loss treaty.

• Does the insurer envisage a long-term relationship with the reinsurer who will ‘follow the fortunes’ of
the insurer, the type of relationship to which proportional treaties lend themselves? In contrast, the
insurer may only require protection against losses over a specified amount, with both parties being
prepared to review the arrangements on a yearly basis.
6 • Should reciprocity be pursued? Proportional treaties are suitable here while non-proportional treaties
Chapter • What is the cost of operation? Clearly, a quota share treaty is simpler to operate than a surplus treaty. Reference copy for CII Face to Face Training
are less suitable.

Under the former, all policies are subject to the same percentage of reinsurance for premiums and
claims; whereas under the latter, separate calculations are necessary for each policy. An excess of
loss treaty is even simpler to operate. The reinsurance cost is calculated as a percentage of the
insurer’s annual premium income, and the number of claims under the treaty is limited since only
those in excess of the deductible fall under the treaty. As we know, most excess of loss treaties are
also subject to limited reinstatements. This aspect is part of the overall costing of an excess of loss
treaty.

A2 Combinations of treaties

When the insurer has decided which type of cover is suitable for its particular circumstances, a treaty or
a combination of treaties may be arranged to provide a programme of effective cover.

Example 6.1
In figure 6.1 we can see a combination of retention, a quota share and surplus treaties.
In this illustration, the insurer wishes to accept property risks with a maximum sum insured of £2m. The insurer’s
net retention is £100,000. A 50% quota share provides capacity for a further £100,000, giving a gross retention of
£200,000. A four gross line first surplus treaty provides capacity for £800,000, while a five gross line second
surplus treaty provides a further £1m. This arrangement allows the insurer to accept risks of up to £2m. Losses will
be shared in the same ratio of exposure and premiums ceded. Commission will be negotiated according to the
profitability of the account. The arrangements lend themselves to reciprocity if the insurer wishes to pursue it.

Figure 6.1: Retention, quota share and surplus treaties

4 gross line 5 gross line
Retention 50% quota share 1st surplus 2nd surplus
£100,000 £100,000
£800,000 £1,000,000