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10/16 M97/February 2018 Reinsurance

Figure 10.3: Exposure method

40

30
A axis

20

10

0
25 45 65 85 100

B axis

Figure 10.3 is an example of a rating diagram, which a reinsurer may use to ascertain the proportion of
the reinsured’s premium income for each band of risks, according to values or sums insured, assuming a
deductible in the first instance of £100,000. The A axis shows the percentage of the reinsured’s premium
income for the band/class of risk. The B axis denotes the ratio of the deductible to the average value of
the band/class of risk.

If average value for band = £135,000 and deductible = £100,000:
=
Ratio = 100 ×100 74% Reference copy for CII Face to Face Training
135
For this ratio of deductible to average value of the band, and using the diagram, the reinsurer will want
12% of the premium income of the band for the cover, according to its experience and the formula it
uses. Other reinsurers may have similar rating diagrams but their values may be different.

Table 10.3: Exposure method
Deductible/average value Reinsurer’s % Portion of reinsured’s
% of premium premium for band
£
143 nil nil
74 12 486,000
59 15 573,750

38 21 409,500
26 28 159,600
23 31 99,980
Total premium 1,728,830

This amount can be converted into an appropriate percentage of the reinsured’s total risk premium and
may be further loaded to take account of expenses, contingency and profit to the reinsurer.
10
Chapter C5C Key rating considerations
The key features for the calculation of the excess of loss premiums for a catastrophe programme are:

• The perils that give rise to the catastrophe exposure, e.g. earthquake, hurricane, flood etc.
• The aggregate of the sums insured exposed, after taking into account per risk reinsurance, for the
specific peril and in a specific region. The market has identified regions of exposure throughout the
world, that is, geographical locations where a catastrophe event is likely to occur.