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Chapter 10 Property reinsurance 10/15

• Do the loss figures represent the anticipated final cost of the claims? This may not be such an issue for
property claims but will be an important factor in liability classes of business.
• Are there significant or noticeable fluctuations in the costs of claims from one year to another? This
may indicate an unbalanced portfolio as a result of the underwriting policy of the reinsured. The
reinsurer should try to understand the reasons for such fluctuations, possibly by comparing the loss
experience with that of similar treaties from the same area.
• What level of loading factor would be appropriate to allow a margin for expenses and profit? These
loading factors vary from risk to risk and class to class and are customarily expressed as ‘improper’ or
‘top heavy’ fractions, for example:
100 = 25% loading
80th
100 = 33.33% loading
75th

A loading should also be included to allow for claims arising before the reinsurer has been able to build
A loading should also
a fund to meet them and for the fact that the reinsurer is supporting the reinsured with its capital and be included
security.
Contracts written on this basis are negotiated with a minimum and a maximum rate so that the reinsured
is rewarded for a good claims experience and the reinsurer is compensated for a poor loss experience
within boundaries. Burning cost layers also have a deposit premium to provide positive cash flow in
advance and usually a minimum premium – often equal to the deposit premium – to ensure that the
reinsurer receives a known return for providing cover.

C5B Exposure method
Whereas the burning cost method is based on past experience, the reinsurer may adopt the exposure
method of rating for facultative and excess of loss ‘working’ treaty contracts. This is based on the
principle that as the deductible declines in relation to the average value of the band into which a risk
could be placed, the reinsurance premium should rise. This is because in a total loss there is a greater
likelihood of the deductible being surpassed and the claim affecting the reinsurer. Reference copy for CII Face to Face Training

Be aware
The same in not necessarily true of partial losses.

For a given exposure of deductible to limit, the reinsurer would base its premium on a risk profile, or
groups of risks of similar value placed in ‘bands’. A reinsured’s property risks may be sorted into bands
with an average value calculated and the deductible expressed as a ratio of the average value for
each band.

Example 10.7
Taking a deductible of £100,000, the ratio to the average value of each band would be as follows:
Average value of band Aggregate premium for band Deductible average value
£ £ £
1 70,000 1,575,000 143

2 135,000 4,050,000 74
3 170,000 3,825,000 59
4 260,000 1,950,000 38
5 380,000 570,000 26
6 430,000 322,500 23
Total 12,292,500 Chapter

As the deductible declines in relation to the average value of the band and the reinsurer’s ratio
increases, the reinsurance premium should rise. Using the type of scale depicted in figure 10.3, the 10
reinsurer would calculate for a layer of excess of loss cover the percentage of the reinsured’s premium
income for each band for a portfolio such as the one described, and with a deductible of £100,000, as
follows.