Page 304 - M97TB9_2018-19_[low-res]_F2F_Neat2

11/14 M97/February 2018 Reinsurance

D3 Types of reinsurance purchased
Facultative reinsurance has some application for large or unusual risks which do not readily fit into a
Excess of loss is the
most popular form of cedant’s treaty arrangements. Some opportunities exist for proportional business but excess of loss is
coverage the most popular form of coverage. Cover would be on a losses occurring basis but with unlimited
sideways reinstatements. EL reinsurance can be rated on an experience or exposure basis.

E Workers’ compensation

Workers’ compensation insurance covers an employer’s liability that arises from employees’ injuries
sustained at work. This is generally in line with the relevant country or state’s workers’ compensation
act, which in many cases imposes strict liability. However, coverage is generally limited to some degree
either by quantum or by time.
Example 11.5
In the USA, workers’ compensation is administered state by state, with public and private funding sometimes
operating in tandem. A few states have state-owned monopolies, although in most compensation is provided solely
by private insurance companies. In some states indemnity is usually limited to two thirds of lost wages. Some
southern states impose a limit as to the length of time any injured party can claim for. The Federal Government deals
with its obligations to its own employees through regular appropriations.

This class of business does bear certain resemblances to personal accident insurance, but there are
serious dangers if the two are not differentiated as accumulations under workers’ compensation
insurance can be significant and can seriously affect a reinsurer.

Example 11.6
In Sphere Drake Insurance v. Euro International Underwriting Ltd (2003), Euro International Underwriting Ltd
(EIU) was granted underwriting authority for traditional personal accident business. In fact, it wrote a large volume of
workers’ compensation ‘carve-out’ reinsurance, which enabled a large part of the exposure arising from US workers’
compensation risks, traditionally written in the property and casualty market, to be placed instead in life and personal Reference copy for CII Face to Face Training
accident markets. During the 18 or so months when the binding authority operated, EIU accepted a total of 119
contracts of reinsurance. The court found for Sphere Drake on all material grounds who, as a result were able to
avoid losses alleged to have been in the region of US$250m.

This has consequentially had a severe impact on the coverage of workers’ compensation insurance,
especially the retrocession coverage of such.

E1 Reinsurance issues

Matters of this nature have made underwriters reluctant to issue facilities such as line slips, binding
authorities, broker covers and captive accounts. Other issues that concern underwriters of workers’
compensation business include the following:

• Reinsurance treaties which do not exclude war, civil war, nuclear energy risks, radiation damage and
terrorism.
• Treaties with no ‘change in law’ clause. Workers’ compensation insurance, because it is strongly
determined by statutes imposed by government or state legislature, is more strongly influenced by
potential changes in law than most other types of insurance.
• The manufacture, use, installation and removal of asbestos giving rise to asbestosis and other
processes leading to other occupational diseases. Workers’ compensation insurance, in the USA
particularly and more recently in other developed countries, has been strongly affected by claims for
various types of asbestosis diseases from workers, sometimes many years after they stopped working
for the company. The increasing claims from asbestosis and other environmental losses have forced
many reinsurance companies to increase their reserves substantially to take account of this issue.

E1A Accident and health (A&H) insurance

Accident and health (A&H) insurance includes annual private medical insurance cover for hospital
Often written on a
group basis expenses, including operation, treatment and nursing costs. It is often written on a group basis covering
the employees of a particular company. It is a major class of business in the USA and is an important
11 benefit to employees provided by employers who arrange group insurance cover, as medical insurance
Chapter by the government is very limited.