Page 275 - M97TB9_2018-19_[low-res]_F2F_Neat2

Chapter 10 Property reinsurance 10/7

– Accounts. What conditions will apply to the presentation and settlement of the technical accounts?
The imposition of time limits for the rendering and settlement of accounts is advantageous to the
reinsurer as it assists in maintaining cash flow as well as enabling it to monitor the performance of
the reinsurance on a regular basis. Any provision for the settlement of large losses outside the
normal accounting cycle should be made clear and agreed. This is defined in the treaty conditions
as the cash call or the cash loss limit.
– Period. The contract will stipulate the period for which reinsurance is required and any cancellation
provisions that will apply. With proportional treaties it is usually agreed to review them at each
anniversary from the date on which the arrangement commenced.
– Commission. The level of ceding commission forms a major part of the negotiation of any
proportional reinsurance. It is the primary tool available to the underwriter in the pricing of the cover
given. Ceding commission can be at a flat percentage rate or on a sliding scale. A flat percentage
rate may be negotiated in combination with a profit commission.
– Brokerage. If the reinsurer is accepting the business through a reinsurance broker, then the
question of brokerage is a factor in successfully negotiating the reinsurance arrangements.
Activity
Find out the typical level of brokerage (as a percentage of premium income) that would be paid for a proportional
treaty acceptance.

• The attitude of the reinsured’s management to the generation of premium income influences the
reinsurer’s perception of the business being offered and any information to establish their
development philosophy would be material to negotiations. A company with a cautious attitude to risk
or which is operating within a recognised structure of original rates will produce a stable premium
income. If the company is aggressively seeking to increase its market share it may be seeking new
business by cutting established rates. While this may be generating an increase in premium income,
the relationship between the liability being assumed and the reinsurance premium may be adversely
affected.
• The reinsured’s experience in the class of business being reinsured is considered material
information, as inexperience or a poor record affects a reinsurer’s exposure to potential major losses. Reference copy for CII Face to Face Training
• Total amount of reinsurance requested. Too much cover will result in the reinsured paying unnecessary
premium while too little leaves the reinsured with additional and unrecoverable net retained losses.
The scope and size of any event protection is influenced by the extent to which the reinsured’s portfolio
Retention will also be
of risks is exposed to the possibility of an unexpected disaster or unpredictable aggregation of claims. influenced by the
This will undoubtedly affect not only the total limits of the reinsurance but also the size of the financial strength of
the reinsured
reinsured’s retention. This retention will also be influenced by the financial strength of the reinsured as
well as its aggregated liabilities in any one area.

B1 Suitability of proportional reinsurance to property risks
Property insurance is essentially short-tail in nature, that is to say, losses are usually known about by
the insurer soon after they occur and it does not have the latency that is found in liability classes. On the
whole, claims tend to be settled relatively quickly, although complications and disputes can arise with
large claims meaning that they remain unsettled for a few years.
The short-tail nature of property lends itself to the accounting of proportional treaties on a portfolio
transfer or clean cut basis. This method brings an early element of finality to the results of the
reinsurance. They can of course be accounted on an underwriting year basis. This method allows liability
under original policies to run off to natural expiry and losses to extinction, i.e. when all incurred losses
have been fully and finally settled.
It is preferable that a reinsurer analyses its business on the basis of the reinsured’s revenue year and
the reinsurer’s revenue year. While the reinsured’s figures will report one year at a time, the reinsurer
may have a more unclosed account at any time due to the delays in reporting or submitting periodic Chapter
technical accounts. On an underwriting year basis, the length of the development period is dependent
on the class of business. 10

Question 10.4

What is the typical development characteristic of a property account?