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Chapter 10 Property reinsurance 10/17

Activity
Visit www.bbc.co.uk/news/world-asia-37970775 to discover the type of natural peril most prevalent in the Asia
Pacific Rim.

• The estimated MPL from the aggregate of the exposures for a peril in a region. The MPL will be less
than the total exposure for a peril in a region because there is unlikely to be total destruction.
However, the assessment of the amount of destruction will differ according to the peril, the region and
the reinsurer’s own individual assessment.
• The total premium required for the catastrophe peril in respect of the MPL. This is an assessment
made by the reinsurer. A reinsurer may assess that the catastrophe premium requirement is 15% of the
reinsured’s gross net premium income (GNPI).
• The catastrophe premium must be distributed between the amount retained by the reinsured (the
deductible) for any one event, and the excess of loss programme, which is usually made up of a
number of layers. The distribution of premium follows a similar concept to the rating of risk excess of
loss. Reinsurers have different rating techniques but essentially they relate to the probability of an
event resulting in a loss at different amounts relative to the MPL. The deductible and cover is
expressed as a ratio of the MPL.

Consider this…
There is an ‘inverse’ relationship between the deductible ratio and the requirement for catastrophe premium on the
excess of loss layers and so, as the former becomes higher the latter becomes lower.

• There are limits to this rating concept, particularly for top layers where, irrespective of the technical
requirement, the reinsurers will require a minimum premium for the exposure.
• Reinsurers will not provide unlimited catastrophe excess of loss reinstatements, and there are a
variety of ways that premiums can be calculated. Consider the following scenarios, based on one
reinstatement, starting with the most common method first.

Example 10.8
A treaty runs from 1 January 2017 for twelve months. Cover is $20m excess of $6m. Losses from the ground up of Reference copy for CII Face to Face Training
$13m occur on 1 July. Ultimate premium is $X.
Scene 1: Reinstatement at 100% additional premium (100% as to time and pro rata as to amount).
Premium is X × 50%.
Scene 2: Reinstatement at 100% additional premium (pro rata as to time and pro rata as to amount).
Premium is X × 50% × 50%.
Scene 3: Reinstatement at 50% additional premium (pro rata as to time and pro rata as to amount).
Premium is X × 50% × 50% × 50%.

However, the total reinsurance premium for higher layers of cover will be less, since the underlying
cover, as depicted in this example, will be taken into account.
The rating of stop loss covers tends to be dealt with on an individual basis and the concept of ‘payback’
The rating of stop loss
is evident. This depends essentially on an assessment by the reinsurer of the maximum exposure covers tend to be
presented by the portfolio and a subjective anticipation of the possibility of a total loss. The reinsurer dealt with on an
individual basis
then charges a level of premium which will generate sufficient income over a number of years to fund a
total loss, loaded to allow for partial losses and expenses and to provide for some profit.
Other general considerations in the rating of non-proportional treaties concern the ratio of the cover to
the reinsured’s underwriting limits; clearly, the reinsurers do not wish to be providing high levels of
cover while the reinsured remains relatively unexposed. It is also important to ascertain whether the
reinsured arranges its retention on actual sums insured, EMLs, or a combination of both, as the
reinsurer’s liability will be affected. The reinsured’s experience in the business with information relating
to premium growth and loss amounts, frequency and trends, particularly in relation to the deductible
and limit, will also be of significance. The reinsurer will also wish to consider how many free Chapter
reinstatements, if any, it is prepared to give in arriving at the rate.
The calculation of the premium should take into account minimum and maximum rates and the extent to 10
Take into account
which the premium is adjustable in light of the treaty’s experience and the reinsured’s income. Finally, minimum and
allowance must be made for expenses, brokerage and profit and perhaps a security loading. maximum rates