Page 141 - M97TB9_2018-19_[low-res]_F2F_Neat2

Chapter 6 Reinsurance programmes 6/9

The disadvantages of combining several classes of liability business in one treaty are as follows:
• The insurer is often unable to split reinsurance costs accurately between different departments or
classes. Many reinsurers are now required to justify their exposures by identifying premiums that
correspond to such exposures. In the absence of actual premiums, notional amounts are
sometimes used.
• A common retention level applies to all classes for excess of loss cover.

Consider this…
Consider an insurer whose combined account is mainly motor business. The motor account would be suited to the
highest reinsurance retention, yet its smaller public liability or employers’ liability components would still have to
carry the same retention under a combined protection.

• It is more difficult for the reinsurer to exercise underwriting judgment since the results of different
classes are obscured.
• Different classes of business may end up subsidising one another.

Reinforce
Before you move on, make sure you know the factors determining the choice of treaty and the way in which
combinations of contracts are used.

A4 Comparing the net experience of different programmes

In general, both proportional and non-proportional solutions are used when putting a reinsurance
programme together.

Proportional reinsurance is used to reduce the gross exposure; excess of loss reinsurance, including
Proportional
catastrophe excess of loss, and other non-proportional types are used to reduce the net exposure. reinsurance is used to
However, it should be noted that different types of reinsurance cover give different results. An insurer reduce the gross
exposure
obtains greater coverage under a quota share but would expect to pay more premiums. In certain Chapter
situations only one type of cover would be suitable. Reference copy for CII Face to Face Training 6
Be aware
If a property account is in a geographical area frequently hit by hurricanes, a proportional cover will not adequately
protect the insurer as it still has to pay a proportion of every risk. It would seek an excess of loss reinsurance
protection to ensure that it was not severely affected by the aggregation of a number of small losses.

The reinsured would have to consider the historical development of its account and assess what type of
reinsurance programme might provide the best possible cover and what the price of that cover might be.
Example 6.6
A company that accepts fire business up to a maximum sum insured of £500,000 considers the following two
possible reinsurance programmes, each designed to limit its maximum liability per risk to £100,000.
Programme 1
80% quota share with 40% ceding commission (reinsurance commission) subject to maximum gross acceptance of
£500,000.
Programme 2
Risk excess cover of £400,000 XS £100,000 premium adjustable at 20% of original gross premium (OGP).
Assume that:
• the company’s OGP is £10m and that its commission and expense ratios relative to the OGP are 15% and 20%,
respectively;
• during the first year, total claims amount to £5m but only ten claims exceed the £100,000 priority under the
proposed risk excess of loss cover. The total recoveries that would be made thereunder amount to £1.5m.