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Figure 3.1: Protecting the common account
(i) TSI (total sum insured) (ii) TSI

Fac. excess
protecting Pro rata Fac. excess
cedant’s treaty for common
retention account
3
Chapter

Cedant’s Cedant’s Pro rata
absolute net absolute net treaty
retention retention

0 Retained by Ceded to 100% 0 20% 100%
cedant pro rata treaties
20%
(say)

In part (i) the reinsured (or cedant) has bought facultative excess of loss reinsurance to protect its
retention under a proportional treaty. In part (ii) the reinsured has extended the same excess of loss
reinsurance to protect the common account.
The protection could be relatively inexpensive and the reinsured might decide to pay for such protection Reference copy for CII Face to Face Training
itself rather than asking the reinsurer to contribute.

Be aware
Some proportional treaty reinsurers might not accept common account protection as it could significantly affect the
proportional treaty loss experience. Therefore, the ceding insurer should ensure that this method is acceptable under
the terms and conditions of its treaties before arranging the cover.

Question 3.1

It seems surprising that a reinsured would want to incur this extra cost. What would its motivation be to do so?

The reinsured should still ensure that facultative excess of loss reinsurance is permitted under the terms
of its automatic proportional treaties, as any payment for such facultative reinsurance would reduce the
premium shared with reinsurers under the proportional reinsurance.
Facultative reinsurance arranged on a non-proportional basis is often ceded in layers. The layers are
defined in terms of amounts of insurance so that the reinsurer or reinsurers only pay out if the total claim
suffered by the insurer exceeds a stated amount known as the retention. One reinsurer will receive all
reinsurance up to the limit of the first layer. A second reinsurer will receive all reinsurance in excess of
the first layer up to the limit of the second layer, and so on, depending on the number of layers.
For example, the insurer may be prepared to accept a total loss up to $20m, and purchases a layer of
reinsurance of $4m in excess of a $1m retention. Further layers of cover are then purchased from other
reinsurers until the total cover required of $20m has been accommodated.

Structurally, the coverage could look like this:

Reinsurer C covers $10m
Reinsurer B covers $5m
Reinsurer A covers $4m
Insurer retains $1m