Page 277 - M97TB9_2018-19_[low-res]_F2F_Neat2

Chapter 10 Property reinsurance 10/9

In view of the possible exposure to catastrophic losses, information regarding the geographical locations
of the reinsured’s operations is essential information. This is particularly important if the reinsured is
exposed to, or offering cover for, natural perils such as earthquake or windstorm.
Excess of loss reinsurances can be particularly exposed to losses as the result of a failure in the
calculation of EMLs. This is especially important with risk or working excess of loss covers, where the
reinsurer is expecting to receive a number of losses in any one period of reinsurance. The reinsured
should confirm whether it is using original sums insured or EML predictions on which to base its
retentions.
Non-proportional reinsurance in all its forms gives the reinsured considerable flexibility in arranging a
Gives the reinsured
balanced reinsurance programme. It provides cover for losses to large risks and the ‘catastrophe’, while considerable
the facultative contract provides capacity which may not be available to the proportional treaty. flexibility in arranging
a balanced
However, the reinsured must also be careful in deciding to choose this type of cover, particularly where reinsurance
the ‘working’ excess of loss treaty is being considered as a replacement for the proportional treaty; these programme
contracts operate a similar level, but the choice has markedly different implications.

In opting for an excess of loss working treaty, the reinsured must consider the level of the deductible as
it has to bear all the losses in full up to the deductible in addition to those that exceed the limit of cover
selected. If the reinsurer pitches the deductible at too high a level, the reinsured may have to fund more
losses than it anticipated if the loss experience deteriorates.

Question 10.6

What are the likely consequences of pitching the deductible at too low a level?

Although catastrophe treaties are not comparable with proportional treaties in regard to their function,
Reinsured must also
the reinsured must take care when considering this type of cover, to record its commitments which could ensure that there are
aggregate for the purposes of, for example, earthquake, flood, hurricane or other environmental perils. no ‘gaps’ between
different layer
Failure to do so could result in the maximum probable loss (MPL) and the deductible being similarly
underestimated and the limit of the reinsurers’ cover being inadequate. The reinsured must also ensure
that there are no ‘gaps’ between different layers. Reference copy for CII Face to Face Training

The underwriting of non-proportional contracts is also fraught with problems for the reinsurer. In general
terms, these contracts present several characteristics which the reinsurance underwriter has to face:

the reinsurance portfolio is
difficult to balance as it consists the reinsurance underwriter
of many contracts, from many is distant from the reinsured’s
reinsureds, each addressing its Characteristics original rating structure
own markets and types of risk of contracts

there are large
differences in the premiums charged
exposure as shares are small in relation to
and limits vary many treaties can the potential liabilities
be hit by the same
catastrophe

As far as individual treaties are concerned, the basis of cover is important, whether a per risk or
catastrophe/event cover, as it reflects the expected frequency and level of losses. The reinsurer should
ascertain the pertinent facts about the risks to be run. For this reason, reinsurers often ask the reinsured
to complete a questionnaire, the answers to which should reveal the size, nature, sums insured and
complexity of the portfolio.

Be aware
Such a questionnaire should also determine the risk profile in relation to how many risks are commercial, industrial Chapter
or residential, and their relative values, since this information is important in assessing the risk premium for
catastrophe treaties. 10