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10/10 M97/February 2018 Reinsurance

The reinsurer will also consider and record:
• how the risks are distributed geographically and the possibility of risk accumulation;
• the perils covered; and
• whether there is a susceptibility to catastrophe perils such as hurricanes or earthquakes.

Question 10.7
Why does the reinsurer need to assess its own exposure?

The reinsurer may not wish to participate in all layers of the programme as it may consider its exposure
Reinsurer may not
wish to participate in in relation to a catastrophic loss situation to one insurer too excessive and, therefore, it will wish to
all layers of the confine its involvement to certain, non-consecutive layers. The ways in which the reinsurer can control
programme
its exposure will also be of importance. In an event or catastrophe treaty, this will be expressed
through the:
• hours clause;
• limits of their exposure to any one layer; and
• terms of reinstatement.
In per risk treaties, the number of free reinstatements given and the size of the event limit in relation to
individual risk deductibles are important. In this latter type of treaty, the reinsurer will want to know how
the reinsurance is exposed to the different categories of risk and in particular, those of poorer classes.
Another consideration is that if the deductible is relatively low, the treaty will frequently be called into
play. The basis of fixing retentions for categories of risk is important so it is essential to know if they are
based on sums insured or EMLs.
Besides making sure that it is obtaining a reasonable premium for the risk it is running, the reinsurer
should also consider the desirability of the business in terms of the following:
• classes of risk written;
• length of time the reinsured has been in business; and Reference copy for CII Face to Face Training
• reinsured’s premium and loss record.

The contract terms in relation to the adjustment of the premium and the minimum, maximum and
deposits which apply will be important factors in ensuring that the reinsurer obtains a fair premium.
Finally, how the management views the nature and relationship of reinsurance contracts is an important
matter. There must be a certain amount of trust between the parties and the reinsurer should be made
aware of the reasons for the cover being requested in the first place. If one party seems to be resolved to
exploit the other and a sense of partnership is absent, the relationship is unlikely to last for any length
of time.

C1 Facultative excess of loss

A facultative excess of loss arrangement is very useful for insurers who have to obtain additional
This type of
contract is especially capacity, usually at short notice. This type of contract is especially suitable for large industrial risks
suitable for large which may not be covered under a proportional treaty or where the treaty is already full. It is also used to
industrial risks
cover EML error and has become popular with captives to cover the large exposures associated with their
parent companies’ business. Theoretically, the reinsured should be able to retain more premium income
which would otherwise have been given away under the proportional contract.
From the reinsurer’s point of view, an adequate premium must be charged for the cover, and this may be
a substantial part of the original premium. The reinsurer will also be concerned about the details of the
risk, for example, its construction, location and loss prevention procedures as well as the loss ratio and
the amount of the reinsured’s retention in relation to the whole risk.
10 Question 10.8
Chapter What would the reinsurer’s purpose be if it consulted its risk register at this point?