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3/10 M97/February 2018 Reinsurance

In the case of our food processing plant, the insurer could meet its objective of a maximum retained
amount per claim of £500,000 by combining proportional and excess of loss protection. For example,
the insurer could retain 10% of the original risk and reinsure 90% on a pro-rata basis. It could then seek
to purchase excess of loss protection for, say, 10% of £5m excess of £5m and 10% of £40m excess of
£10m which would provide protection up to a total loss. The overall effect would be to reduce the
company’s maximum net exposure to £500,000, being 10% of the first layer deductible. Figure 3.4 shows
how this would look as a diagram.

Figure 3.4: Combining proportional and excess of loss protection
3 retained
Chapter £50m

Excess
reinsurance
2nd layer
90% pro rata
reinsurance

£10m

Excess
reinsurance
1st layer
£5m

£0m
0% 10% 100%

Table 3.1 shows how the loss would be allocated should a loss of £8m occur with the above Reference copy for CII Face to Face Training
reinsurances in place.

Table 3.1: Allocation of loss (£8m)

Proportional facultative £7.2m (90% of £8m)
reinsurers
Insurer retains (gross) £800,000 (10% of £8m)
1st layer reinsurers pay £300,000 (10% of £3m)
2nd layer reinsurers pay Nil
Insurer retains (net) £500,000 (the difference between its gross retention and its excess of loss recovery)

Table 3.2 shows how the loss would be allocated should a loss of £15m occur with the above
reinsurances in place.

Table 3.2: Allocation of loss (£15m)
Proportional facultative £13.5m (90% of £15m)
reinsurers
Insurer retains (gross) £1.5m (10% of £15m)
1st layer reinsurers pay £500,000 (10% of £5m)
2nd layer reinsurers pay £500,000 (10% of £5m)
Insurer retains (net) £500,000 (the difference between its gross retention and its excess of loss recovery)