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4/16 M97/February 2018 Reinsurance

Example 4.10
Let us assume the following facts:
• Original policy period: 1 April 2017 to 31 March 2018.
• Reinsurance treaty period: 1 January 2017 to 31 December 2017.
• Original premium: £730.
• Reinsurer’s share of the original risk premium for the full annual period: £365.

On a daily basis, the premium would be earned over two reinsurance treaty years. In the example below, the treaty
years are 2017 and 2018.
It can be seen from table 4.8 which follows that in April 2017, for example, £60 of the premium was earned: i.e. as
at the last day of April 2017, £60 of the £730 insurance premium had been earned and the rest (£670) remained
unearned. It was earned in the sense that the reinsured had carried out a service in return for receiving that premium
because it was liable for any claims under the original policy in that period.

4 Table 4.8: Period of original risk: 1 April 2017–31 March 2018
Chapter Month Insurer’s gross cumulative decreasing Reinsurer’s Reinsurer’s 50%
Insurer’s
Insurer’s
premium, £
quota share
50% quota
unearned
earned
unearned
premium, £
premium, £ premium, £ share earned decreasing
premium, £
April 2017 60 60 670 30 335
May 2017 62 122 608 31 304
June 2017 60 182 548 30 274
July 2017 62 244 486 31 243
August 2017 62 306 434 31 217
September 2017 60 366 364 30 182 Reference copy for CII Face to Face Training
October 2017 62 428 302 31 151
November 2017 60 488 242 30 121
December 2017 62 550 180 31 90
January 2018 62 612 118 31 59
February 2018 56 668 62 28 31
March 2018 62 730 0 31 0

Total 730 730 0 365 0
Original gross premium: £730. Risk subject to 50% quota share (QS) cession. Earned premium/expired risk and unearned premium/
unexpired risk are calculated on daily basis (days in month will therefore differ).
Note: reinsured’s net retained share after 50% QS cession would be same as reinsurer’s 50% QS cession.

Example 4.10 relates only to one risk and has been calculated on a ‘proportionate to time’ basis.
Although it is possible to undertake such a calculation in respect of each risk reinsured, there may be
Assumes that original
risks attach more or hundreds or thousands of risks written by the reinsured each year, which makes such a system difficult
less uniformly during to operate and verify. As an alternative, the reinsurance market has devised some comparatively simple
the year
methods to calculate an equitable premium to be transferred from one set of reinsurers to another.