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Chapter 3 Features and operation of facultative reinsurance 3/7

Question 3.2
An original insured has a risk valued at £10m which is written 100% by insurer C.
The EML is determined at 60% by C which then decides to buy a facultative excess of loss reinsurance for £3m
excess of £3m.
The insured has a loss giving rise to a valid claim of £7m. C has no other reinsurance on this risk.
How much does the insured recover?
How much of the loss is borne by C, bearing in mind the error it has made in its EML calculation, and how much by
its reinsurer? Chapter

Retention 3
Other factors which influence the retention in a facultative arrangement are:
• the class of risk in terms of its vulnerability (the insurer will tend to retain more of the ‘good’ risks than
the ‘bad’);
• any other commitments on the risk;
• exposures from other nearby risks; and
• particular features of the risk which make it more or less attractive.

B Calculation of reinsurance premiums and claims

recoveries

The reinsurance premium is the price of the cover charged by the reinsurer in consideration for offering
Premium is the price
to underwrite the risk. In all contracts of reinsurance, the premium is a reflection of the original insurer’s of the cover
risk passed to the reinsurer. The basis for calculation of the reinsurance premium varies according to the
type of reinsurance contract.

B1 Facultative proportional Reference copy for CII Face to Face Training
The premium is the financial consideration paid by the ceding insurer to the reinsurer in consideration
for the acceptance of the risk reinsured under the contract.
When a risk is reinsured on a proportional basis premium, and claims calculations are straightforward
because the liability is being shared in a fixed proportion between the reinsured and its reinsurer, the
likelihood of loss is the same for both. Consequently, the original premium for the risk will also be
shared between the parties concerned in the same proportion as the liability. For example, if a reinsurer
assumes 50% of the liability, it will expect to receive 50% of the premium less commission and will
expect to pay 50% of any claims up to the policy limit. Thus, the reinsurer will be liable to pay its
percentage share of any partial losses.

Question 3.3

Reinsurer R accepts 10% of a facultative proportional reinsurance with a sum insured of £50m at an original gross
rate of 2‰ (per mille). What is the gross premium due to R?

B2 Facultative non-proportional

Unlike proportional reinsurance, where the premium paid by the reinsured bears a proportional
relationship to the risk reinsured, the dynamics of non-proportional premium assessment are different.

Consider this…
Why do you think this is so?

When the reinsurance is placed on an excess of loss basis, this would not be an equitable manner in
which to allocate the premium as the potential distribution of losses would not be the same.