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Chapter 4 Features and operation of proportional reinsurance treaties 4/17

The most common methods are as follows and each assumes that original risks attach more or less
uniformly during the year:

Methods to calculate
an equitable premium
to be transferred from
Fixed percentage. one set of reinsurers Twenty-fourths basis.
Under this method a simple to another Under this method, which
percentage (usually 35%) provides greater precision than
is applied to the premium the eighths basis, each calendar
accounted to reinsurers in the month is divided equally into
outgoing year, and is paid to two, making 24 blocks of earned
reinsurers in the incoming Eighths basis. and unearned premium and a
year as premium portfolio Under this method, each of the fraction of 24 is applied on a
(see appendix 4.1). progressive earned/unearned
four calendar quarters is divided
equally into two, making eight basis (see appendix 4.3). Chapter
blocks of premium. Each block
has an earned and unearned 4
element and a fraction of eight is
applied on a progressive
earned/unearned basis
(see appendix 4.2).

Question 4.3
A treaty has an anniversary date of 1 January and runs for a calendar year. What percentage of a twelve-month
original policy premium is earned when the policy is ceded to the treaty on 1 April of the same year?

Transfer of portfolio can arise in the following circumstances:
• Where the reinsured wants a new treaty to assume the portfolio of business in force at the inception of Reference copy for CII Face to Face Training
the treaty, or a new reinsurer to assume the portfolio from a retiring reinsurer. A portfolio premium,
expressed as a percentage of the preceding twelve months’ written premium, is transferred to the
assuming reinsurer. The loss portfolio can similarly be assumed and the amount, expressed as a
percentage of estimated outstanding losses at the assumption date, is likewise transferred.
• Withdrawal of portfolio arises where there is an option, usually open to the reinsured only, to withdraw
premiums and outstanding losses upon termination. This can either be of the entire treaty or of a
retiring reinsurer’s participation where the replacing reinsurer assumes the portfolio. The withdrawal
of portfolio by the reinsured from a retiring reinsurer operates on exactly the same basis as for the
assumption of portfolio, amounts being debited to the reinsurer instead of credited.
• A treaty on an underwriting year basis may provide for the closing of each year after a specified period,
say three or five accounting years, and the transfer of any subsisting liability into the next open
underwriting year. In these cases, provision is made for the transfer of a portfolio amount into the next
open year representing both unexpired liability and outstanding losses.

Be aware
Where the loss portfolio is transferred, it is usual to include the provision that if an individual loss is settled for an
amount materially different from its reserved amount, the account can be reopened and a suitable adjustment made,
making the settlement equitable to all parties.

B2B Worked example
At the end of the year when transferring the business from one accounting year to the next, it must be
Must be determined
determined what has been earned and what remains unearned from a book of business. As previously what has been earned
explained, the unearned premium is for that part of the risks that has not as yet expired at the end of the and what remains
unearned
accounting year and so there must also be some premium reserve set up against the potential liabilities
arising from these exposures.
This reserve, less the reinsurance commission for the accounting year, is deducted from the original
premium written. The reserve less reinsurance commission from the end of the previous year is then
added, as that exposure has ended in the meantime. In the following example, the premium reserve is
based on the so-called twenty-fourths method.