Page 286 - M97TB9_2018-19_[low-res]_F2F_Neat2

10/18 M97/February 2018 Reinsurance

Key points

The main ideas covered by this chapter can be summarised as follows:
Reinsuring a property account
• Property insurance covers insured property against losses arising from physical damage such as fire, flood and
other extraneous sources.
• ‘Property’ is an inclusive term and embraces:
– fire, perils and related material risks;
– business interruption;
– theft;
– goods in transit;
– data; and
– ‘money’.
• Recognising that different types of risk present different hazards, a property insurer’s table of limits will indicate the
amount of the sum insured (or EML) which it is prepared to retain for individual risks, according to its risk
classification.
• EML can be defined as ‘an estimate of the monetary loss which could be sustained on a single risk as a result of a
single fire or explosion considered by the underwriter to be within the realms of probability’. It allows the insurer to
adjust its retention by considering its expected exposure in relation to its theoretical one.
• An ‘EML error’ has occurred when the EML has been miscalculated and leads to a higher loss than was anticipated.
If the EML error is substantial, reinsurers may, in theory, allege that material misrepresentation has taken place.
Underwriting features of proportional reinsurance
• Property insurance is suited to proportional reinsurance, whether by the facultative or the treaty method because,
unlike liability classes, it has clear insured values.
• Reinsurers need to consider:
– risks to be excluded from the reinsured’s original book of business;
– the split between definable classes of risk;
– the extent to which additional perils are covered; Reference copy for CII Face to Face Training
– the experience of the reinsured’s underwriters;
– the reinsured’s attitude to risk as reflected by its underwriting policy;
– the relationship of the net retention and treaty capacity to the reinsured’s premium income; and
– the results of the account to be protected over the past five to ten years.
Other considerations include portfolio transfers and accounting protocol.
• Property claims tend to be settled relatively quickly and are said to be ‘short-tail’ in nature, which lends itself to the
accounting of proportional treaties on a portfolio transfer or clean cut basis.
• The reinsurer influences the pricing of a proportional reinsurance by negotiating the level of ceding and profit
commissions to be allowed by the reinsured.
• Many reinsurers prefer to use a sliding scale of commission rather than a combination of flat commission and
additional profit commission, so as to achieve an immediate result at the end of the treaty period.

10
Chapter