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11/4 M97/February 2018 Reinsurance

If the application for cover relates to a non-proportional treaty the following information would be
required:
• Serial loss potential from products, professional, employers’ and environmental liability business.
• Information on individual claims from ground up (FGU) by accident years, split between amounts paid
and reserved, over a minimum five year period.
• The price or wage indices used to develop the cost of claims.
• Information on the reinsurance required in relation to treaty structure and layering.

A3 Scope of the reinsurance treaty

All reinsurance contracts should contain a clear and positive description of the treaty’s material scope
of cover.

Be aware
Terms which are unclear can lead to complications. References to ‘cover is provided for all policies written in the XY
department’, or ‘cover includes all policies classified by the reinsured as XY business’ may create difficulties when
defining eligible risks.

It should also be ensured that the geographical scope of cover of the reinsurance treaty is clearly
Geographical scope of
cover should be defined.
clearly defined
Precise clauses and definitions are particularly important for liability classes as there are a number of
different interpretations of the issues that could arise. An instance would be the time limits applied
to cover.

In proportional reinsurance treaties, underwriters should follow the primary insurer’s time limits
on cover.
In excess of loss treaties, the following points should be borne in mind:

• When issuing a losses occurring form of cover, it is necessary to ensure that there is a clear definition Reference copy for CII Face to Face Training
of the loss occurrence so that it matches that of the underlying policy.
• Where reinsurance is granted on risks attaching basis, the liability extends to all risks underwritten in
a given reinsurance year. Since in this case the reinsurer’s liability matches the term of the original
policies, reinsurers must ensure that no original policy with a period of more than twelve months is
ceded to the treaty.

A4 Types of reinsurance purchased

The usual forms of reinsurance purchased are quota share and excess of loss treaties. The decision
The usual forms of
reinsurance whether a quota share or an excess of loss treaty is more appropriate depends partly on the primary
purchased are quota insurer’s capital structure and partly on the risk profile of the portfolio. Surplus reinsurance treaties are
share and excess of
loss treaties rather rare in liability insurance.
Facultative reinsurance is popular in some specialised circumstances as described later, but in general,
treaty is the preferred option as liability reinsurance tends to be especially about longer-term
relationships between the insurer and their reinsurers, given the nature of the losses that occur in
liability insurance.
In the rating of casualty reinsurance a key factor is the need to revalue past claims and to evaluate future
development. For treaties that have experienced a frequency of loss, such as low level excess layers, the
burning cost method can be used. In such cases, the anticipated final cost of the claims is an important
element in the rating as allowance has to be made for future development of long-tail liabilities. If there
is no loss experience, rating is based on exposure analysis or benchmarking against market analysis.

A5 Combining classes for reinsurance

While reinsurance of whatever type may be purchased for each element of the casualty account, several
Several casualty
classes are often casualty classes are often combined in one treaty. This is especially true for smaller clients whose book
combined in one is most likely to be dominated by motor, as their other liability accounts tend not to be large enough to
treaty
warrant separate excess of loss treaties. Combining classes under quota share treaties is also very easy
and different levels of ceding commission can be accommodated.
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Chapter