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6/24 M97/February 2018 Reinsurance

Question 6.7
What specific information would the evidence of cover document contain in addition to the contract terms and
conditions?

Following the issuance of the evidence of cover document, the last process in the placing of reinsurance
is the issuance of closing instructions.

These take two forms:
•a debit note – to advise the reinsured what money is due to its reinsurer;
•a credit note – to confirm what money reinsurers can expect to receive, either as an excess of loss
premium or as a proportional treaty balance.
These documents enable both parties to establish the appropriate technical and financial records in
their accounts and set the accounting activity in motion.

D Reciprocity

Reciprocity is the exchange of comparable business on a proportional basis by one insurance company
Mutual exchange of
reinsurance with another. In other words, it is the mutual exchange of reinsurance, whereby each company reinsures
the other. The objectives and advantages of such an exchange should be considered in the overall
picture of negotiating the optimum manner in which an insurer’s portfolio or account should be
reinsured.

In proportional reinsurance an insurance company is ceding away a sizeable volume of premium for what
in most cases may be expected to be reasonably profitable business. A means of reducing the effect of
this outflow, while spreading risk and possibly influencing the overall cost of the reinsurance
programme, may be to consider trading business reciprocally.
6 Question 6.8
Chapter We discussed reciprocity briefly in chapter 1, section F5. What is the difference between ‘strict’ and ‘loose’ Reference copy for CII Face to Face Training

reciprocity?

D1 How reciprocity works to enable an insurer to retain gross profit

The main goals of reciprocity are to enable insurers to retain their gross profit while spreading their
business. Let us examine them in turn:

• Retain gross profit
If it is practical for an insurer to exchange its business with business of a comparable or possibly
better quality, the company would be able to retain its gross profit instead of giving it away to
reinsurers. By maintaining the volume of premium income it retains, the insurer would also be able to
achieve higher investment income on its net retained account and keep its expense ratio lower. It is
very rare that a 100% reciprocal exchange of premiums could be arranged. Although substantial
reciprocity may be obtained through proportional treaties and facultative exchanges, professional
reinsurers would not be able to offer full reciprocity, and no direct exchange of business would be
available for excess of loss treaties.
• Spread business
With a few exceptions, companies in the UK no longer exchange treaties amongst themselves.
Consider this…
Think about the likely consequences if they did exchange treaties amongst themselves. They are often participating
in the same original business and therefore, should a major loss occur, they would simply find themselves being
involved in both their direct and inward reinsurance accounts. Their objective of achieving a spread of risk on their
retained account would be nullified.