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Chapter 10 Property reinsurance 10/5

A3 Accumulation of risk
The underwriter is also concerned about an accumulation of risks where, say, several buildings in
proximity to each other are damaged by a common cause or where there are several insured interests in
the same property, such as in a multi-tenure block.
Accumulation may also arise if the insurer already has a commitment on the risk through co-insurance,
or where an insured’s material damage and business interruption policies are placed with the same
insurer. These circumstances increase the likelihood of a higher loss, and the insurer may need to
modify its retention in respect of individual risks to ensure that it is not exposed to an unacceptable
level of losses.

Having introduced property insurance, we now turn to the underwriting considerations inherent in the
different reinsurance methods. Note that, in addition to the general exclusions discussed in chapter 7,
section E7, certain common exclusions appear in property reinsurance contracts. There is a review of the
main ones in appendix 10.1, available on RevisionMate.

Reinforce
Before you move on, make sure that you understand how EML and EML error impact property reinsurance.

B Underwriting features of proportional reinsurance

Property insurance is suited to proportional reinsurance, whether by the facultative or the treaty method,
Suited to proportional
because it has clear insured values, unlike liability classes, and these make it easier for the reinsured to reinsurance because
determine a retention and cession pattern. it has clear insured
values
A reinsurer in a proportional arrangement has undertaken to ‘follow the fortunes’ of the reinsured. It
accepts a proportion of the premiums charged by the reinsured and pays the same proportion of the
claims, no matter what these amount to (subject to any imposition of event limits to control catastrophe
exposure). Since it has no direct influence over the original rating of the insurance written by the
reinsured, the reinsurer has to rely on negotiating the terms and conditions of the reinsurance it Reference copy for CII Face to Face Training
provides to ensure that it receives an adequate premium commensurate with the risk it is taking on.

Apart from general underwriting considerations that apply to all classes of business, property
underwriters need to consider the following issues:
• Any risks or types of coverage that are to be excluded from the reinsured’s original portfolio or which
reinsurers wish to specifically exclude from the reinsurance protection is material information and
must be included in the data available during negotiation of the reinsurance programme. Much of this
information needed by the reinsurer – or the broker, if one is involved – can be obtained from the
reinsured by completion of a detailed questionnaire.
• Analysis of the account to be reinsured should reveal the split between simple, commercial and
industrial risks. It should also reveal whether the account consists solely of direct business or is to
include inwards reinsurance business as this may present the proportional reinsurer with a greater
degree of risk.
Consider this…
Inwards reinsurance cessions from a variety of different sources may create risk accumulations for the reinsurer that
can be difficult to quantify.

• The extent to which the original risks provide protection for additional perils such as consequential
loss, riots, windstorm and earthquake should be identified, as should the balance between any
hazardous and non-hazardous risks.
• Understanding the experience and competence of the direct underwriter has a decisive part to play in
forming the underwriter’s opinion of the business being offered by the reinsured. Chapter

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