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6/18 M97/February 2018 Reinsurance

With a liability account comprising long-tail business, there is a need for reinsurers to project the
anticipated eventual loss experience for each underwriting year. This is because of the length of time it
can take for claims to be reported and settled. Therefore, statistics that predict the possible outcome
are required. Such loss details are called ‘development’ or ‘triangulation’ statistics and will give paid
and outstanding loss figures at annual review dates on an individual claims basis. This information
not only proves invaluable for rating the risk but also gives a significant insight to the insurer’s claims-
reserving philosophy and expertise.
• Exclusions. In addition to any standard exclusions that will be applied, such as nuclear or war risks,
the reinsured should provide, wherever possible, details of the business or perils that it does not
underwrite or for which it does not require reinsurance. Even if such a list is available, it will not be
unusual for reinsurers to impose their own exclusions.

C1C Reinsurance preference
The price and, in some instances, the availability of reinsurance will influence the method of reinsurance
Price influences the
method of chosen. The differences between proportional and non-proportional methods will be considered in the
reinsurance chosen determination of a programme structure:
• Proportional reinsurances: the cost of proportional reinsurance for the insurer is usually a pro rata
share of the premium charged for the original insurance; however, it will seek to retain a percentage of
this premium as a commission for ceding business.

Consider this…
In effect, the reinsurers will be accepting a full share of any liability but receiving a discounted premium. Think about
what the discount represents.

The negotiating of the size of any commission is a key factor with such reinsurances. The insurer seeks
a commission to cover its acquisition costs, such as agent’s and broker’s commission, as well as any
taxes for which it may be liable. In addition, it would look to recover a contribution towards its own
general and administration costs and, possibly, some form of overriding commission from its
6 reinsurers. For a reinsurer, the size of the total commissions being taken on its premium limits its
Chapter potential for profit on the business being ceded, and it is essential for the reinsurer to get an Reference copy for CII Face to Face Training
agreement that is fair to both parties.
• Non-proportional reinsurances: as reinsurers are not participating in each and every loss that arises
on the business being protected, the price for the non-proportional reinsurance cannot be a simple
pro rata share of the original premiums. This applies whether the reinsurance is a facultative single
risk case or an excess of loss treaty protecting an entire account or class of business. Methods have to
be used to arrive at the price of the reinsurance which take the likelihood of loss that is being
transferred to reinsurers into account. Any pricing arrived at would need to make allowance for the
reinsurers’ expenses, potential profit and any brokerage that may be involved, as well as the degree or
possibility of fluctuations in the loss experience.
While for each type or class of business the nature of the material information and statistics required to
negotiate reinsurance protection largely follows a similar pattern or set of categories, there will be
differences of emphasis from one account to another or from one type of reinsurance to another.
Additional or special factors may need to be considered when reviewing particular accounts.

C2 Security considerations for reinsureds

When placing reinsurance, the long-term financial viability of the reinsurers has become a much higher
priority in recent times following the demise of a number of leading reinsurers. These insolvencies have
focused insurers’ minds on the need to analyse comprehensively the security of their outwards
reinsurances.

C2A Security Committee

When purchasing outwards reinsurance, insurers will wish to reinsure with a company or syndicate that
Insurers wish to
reinsure with a is recognised as financially sound and which meets the insurer’s own security requirements. Typically,
company or syndicate those security requirements are managed by a Security Committee whose membership will encompass
recognised as
financially sound personnel from the underwriting, accounting, actuarial and internal audit disciplines, the level of
seniority of those personnel depending on the priority given internally to the Committee’s work.