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Chapter 10 Property reinsurance 10/19

Underwriting features of non-proportional reinsurance
• The number of reinstatement provisions to be included is crucial since the amount of reinsurance cover at any one
level or on any one reinsurance policy is usually limited.
• Excess of loss reinsurances can be particularly exposed to losses as the result of a failure in the calculation
of EMLs.
• Non-proportional contracts present a number of characteristics which the reinsurance underwriter has to face:
– the reinsurance portfolio is difficult to balance as it consists of many contracts, from many reinsureds, each
addressing its own markets and types of risk;
– there are large differences in exposures;
– many treaties can be hit by the same catastrophe;
– premiums charged are small in relation to potential liabilities; and
– the reinsurance underwriter is distant from the reinsured’s original rating structure.
• The reinsurer may 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.
• With reference to treaty terms and conditions, reinsurers can control their exposure to risk as follows:
– In an event or catastrophe treaty, by the hours clause, limits of exposure to any one layer and terms of
reinstatement; and
– In a per risk treaty, by the number of free reinstatements given and the size of the event limit in relation to
individual risk deductibles.
• Facultative excess of loss cover is useful for insurers who have to obtain additional capacity, usually at short notice.
• A per risk excess of loss treaty may be used by a property insurer as an alternative to proportional reinsurance, to
cover all the risks on its books and where, on the basis of its past experience, it is prepared to accept a specified
deductible for all losses.
• Catastrophe excess of loss cover is usually placed to protect a reinsured’s net account against a major catastrophe
affecting a number of individual losses which in total exceed the selected deductible.
• A defined loss occurrence in property treaties may be subject to an hours clause.
• Stop loss treaties restrict annual aggregate losses to a predetermined percentage of the annual premium and
applies after the operation of all other reinsurance recoveries. Reference copy for CII Face to Face Training
• Rating of non-proportional property business, depending on the type of arrangement, may involve either burning
cost or exposure methods.
• The reinsurer bases its premium on a ‘risk profile’, or groups of risks of similar value placed in ‘bands’.
• There is an ‘inverse’ relationship between the deductible and the reinsurer’s ratio, so as the former decreases so
the reinsurer’s premium increases.
• The key features when calculating catastrophe excess of loss premiums are:
– the perils that give rise to the exposure;
– the aggregate of the sums insured exposed;
– the MPL;
– the total premium required for the catastrophe peril in respect of the MPL as a percentage of the ceding insurer’s
GNPI; and
– the reinsurer’s estimation of the probability of an event resulting in loss at different amounts relative to the MPL.
• Reinsurers will not provide unlimited catastrophe excess of loss reinstatements.
• The reinsurers do not want to be providing high levels of cover while the reinsured remains relatively unexposed.
• The premium calculation must allow for expenses, brokerage, profit and a security loading. Chapter

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