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Chapter 6 Reinsurance programmes 6/7

Example 6.2
Figure 6.2 involves a combination of retention of £100,000 and an excess of loss ‘per risk’ treaty for £400,000 in
excess of £100,000, which will protect all risks with a sum insured of £500,000. The insurer is content to pay all
losses up to and including £100,000. However, if an individual loss exceeds this amount, the insurer will seek a
maximum recovery from the reinsurer of £400,000.

Figure 6.2: Retention and excess of loss ‘per risk’ treaties
£400,000 (limit) XS
£100,000 (deductible)
£100,000 retention/deductible

Figure 6.2 represents the cover on a vertical plane, to demonstrate that the claim must pass through the
‘floor’ of the excess of loss cover or, in other words, exceed the deductible. The insurer will retain more
premium than under a proportional arrangement but will not receive any commission. After the
occurrence of a loss, the cover may be reinstated on the payment of an additional premium. The number
of reinstatements is influenced by the expected frequency of loss at that level.
Example 6.3
Figure 6.3 represents a combination of retention, quota share and excess of loss per risk. This arrangement would
permit a gross retention (net plus 50% quota share) of £200,000. The excess of loss treaty would operate if the loss
exceeded £200,000, and would give protection of £1m. The same considerations relating to premium retention and
reinstatement, associated with non-proportional treaties, would apply.
The insurer knows that it has capacity to accept risks up to £1.2m but (probably) the majority will be shared
between itself and the quota share reinsurer. As the diagram shows, the excess of loss treaty exists for the benefit of
the insurer and the quota share reinsurer, but this need not be the case (see figure 6.4). They will share the
premiums for the cover and the recoveries from it in proportion. Reference copy for CII Face to Face Training Chapter

Figure 6.3: Retention, quota share and excess of loss per risk treaties 6

£1,000,000 XS £200,000 any one risk

Retention 50% quota share
£100,000 £100,000

Example 6.4
Figure 6.4 represents a combination of retention, quota share and excess of loss per risk, but this time the per risk
treaty protects only the insurer and not the quota share reinsurer.

The arrangement would enable the insurer to accept risks up to £2.4m. All risks and losses are shared equally, in the
first instance, between the insurer and its quota share reinsurer. However, the excess of loss contract operates to
protect only the insurer excess of £200,000 up to a limit of £1m.

Figure 6.4: Retention, quota share and excess of loss per risk treaties

£1,000,000 XS
£200,000 any one risk
50% quota share
Retention
£100,000