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Chapter 6 Reinsurance programmes 6/25

An effective spread of business can be achieved by exchanging their business reciprocally with
companies overseas. The number of countries with which it would be possible to trade is such that even
the largest proportional treaties need not be placed with more than a select few reinsurers in each
country. The reciprocal exchange of business from each reinsurer would give a wide geographical spread
of risk to the original insurer, thereby reducing the possible effect of any one major loss to its overall
underwriting results. The decline in the reliance on proportional reinsurance has meant that there has
been a reduction in the extent of reciprocal trading.
While it is unlikely that professional reinsurers will provide 100% reciprocity, these major international
companies can provide a wide geographical spread on their own reinsurance treaties. This may be in the
form of the retrocession of a specific treaty or in a share of one of its pools which may be for a specific
region or on a worldwide basis.

Profitability is not synonymous with either premium volume or spread of risk. Usually, a wide
Profitability is not
geographical spread would be expected to improve the likelihood of a more stable profit by the losses in synonymous with
one area being offset by the profits from another, but there is always the risk that a company may find either premium
volume or spread
itself exchanging its own profitable business for poor quality inwards reinsurance business. Therefore, of risk
the emphasis with any reciprocal exchange should be on matching results rather than premium volumes.
As with the more common methods of arranging reinsurance, the quality of the management of the
company and its underwriting records are of prime importance when negotiating to arrange reinsurance
reciprocally.

Be aware
The essence of a successful reciprocal arrangement is that both parties believe they are deriving real benefits from
the relationship. If this is not the case, the partnership is unlikely to survive in the long-term.

The success of any exchange of reinsurance business is affected by the care with which the business to
be exchanged is selected. This care in selection should apply to the choice of company as well as to the
choice of business. In selecting a company with which to exchange business, attention should be given
to the following areas: Chapter

standard of Reference copy for CII Face to Face Training
management 6

past underwriting experience of the
results underwriters

geographical
distribution of the financial standing
business being written

If it is considered essential that a direct underwriter has a good understanding of the nature of the
business it is writing to have a successful account, it is equally essential that a company should have a
good knowledge of the insurer from which it is proposing to accept reinsurance.

Question 6.9

What type of reinsurance contracts and underlying business are best suited to reciprocal exchanges?

As far as possible, the types of insurance covered and the terms and conditions of the treaties should be
matched in regard to commission rates, premium deductions and reserve deposits. While it may be
desirable to break the treaty down into a large number of small shares to maximise the spread of risk,
any one share must be large enough to support the administration costs involved in servicing both the
inwards and outwards reinsurance accounts.