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Chapter 4 Features and operation of proportional reinsurance treaties 4/15

Underwriting year accounting ensures that the reinsurer shares the liability of the insurer under any
given policy ceded to the treaty by booking all accounting transactions to the year of policy inception. It
gives the true result of the business ceded but it can prove an administrative burden since accounting
information has to be produced and rendered to the reinsurer for settlement on a regular basis, each
quarter or half-year, until there are no outstanding liabilities.
Example 4.9
Surplus reinsurance treaty incepts 1 July 2016 and runs for twelve months. This is underwriting year 2016.
Underlying construction all risk policy incepting 31 January 2017 and running for 18 months.
Claim occurs 3 April 2018.

Even though the policy incepts in 2017 and the claim occurs in 2018, the premium for this policy and the claim will
be accounted into the treaty accounts for the underwriting year 2016.

B2 Clean cut accounting

A method of accounting has evolved whereby the lengthy underwriting year accounting process has been Chapter
shortened in effect to a single year by the transfer of portfolio between the reinsurer of one year and the 4
reinsurer of the next. The insurer can operate the treaty by accounting the earned premium to the
reinsurer for a given year and recovering the incurred losses for the same period. This is known as the
clean cut method when premium and loss portfolios are transferred into and out of a year.
In example 4.8, with clean cut accounting, the surplus treaty for the 2015 year would accept the written
premium for the risk incepting 31 January 2016. However, with portfolio transfers any payment for the
claim occurring on 3 April 2017 would fall into a later treaty year, and be recovered from the treaty
incepting in 2016 or a later year depending on how long it takes for the claim to be settled.
B2A Premium and loss portfolio transfer

The main reason for using premium portfolio transfers is to transfer unexpired liability under a treaty
Transfer unexpired
from one reinsurer to another. The portfolio transfer usually takes place on the anniversary date of the liability under a treaty Reference copy for CII Face to Face Training
treaty. Thus, if one reinsurer is to be relieved of its liability under the treaty for policies still in force at from one reinsurer to
another
the end of a treaty period, in the last account of the year it will be debited with a portion of the premium
it received in that year. It can also be relieved of its share of the liabilities for the outstanding claims at
the end of the treaty period by being debited with an amount usually set between 90% and 100% of the
ceding insurer’s reserve. These premium and loss portfolio amounts will then be credited to the
incoming reinsurer.

The effect is to relieve the old reinsurer of any further liability in respect of the unexpired portion of the
risks accepted under that treaty in the preceding years as well as the outstanding losses at the end of
the treaty year. The new reinsurer accepts the future liabilities from the unexpired policies at the date of
transfer and the liability for settlement of outstanding claims from the previous and all preceding years.

Consider this…
Why might a reinsurance company prefer to accept a reinsurance treaty accounted on a portfolio transfer basis?

The premium portfolio represents the share of the unexpired premium of the old reinsurer, subject to
deduction of commission. Therefore, it is necessary to determine the amount of unearned premium that
also needs to be factored into the portfolio transfer.
Example 4.10 will clarify the distinction between earned and unearned premium. It relates only to one
risk and has been calculated on a ‘proportionate to time’ basis.