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The clause in the treaty must make provision for the following:
• The proportion of the ceded written premium which is to be retained by the reinsured. Usually, this is
considered as representing the unearned proportion of premiums ceded.
• How the reserve is to be taken (for example, 40% of each quarter’s premiums) and when this amount
is to be released (for example, in the corresponding quarter of the following year).
• Disposal of the reserve in the event of termination of the treaty. It is usually applied to pay the
reinsurer’s proportion of loss settlements accruing after termination and the balance released on
expiry of all liability.
• The interest payable to the reinsurer on the amount of the reserve held.

D2 Claims or loss reserve deposits

As with the premium reserve deposit, the outstanding claims or loss reserve deposit was developed to
protect a reinsured in case a reinsurer could not meet its obligations.
4 The deposit comprises the amount estimated to be the known outstanding losses to the treaty advised
Chapter date of the treaty with an annual adjustment but sometimes it is adjusted at the close of each quarterly
but not yet settled. Usually, the deposit is established and retained by the reinsured at the anniversary

or half-yearly account.
The reserve may be drawn down every time there is a settlement. Theoretically this means the reserve
should be amended every time there is a movement in the reinsured’s reserve or there is a claim
settlement. This is administratively time-consuming and costly. Therefore, in reality this reserve is
generally withheld and released at the end of a specified accounting period, and is based on the losses
outstanding at that date.
Claims reserves affect the experience of individual treaties from the reinsurer’s perspective, because the
more funds are retained by the reinsured, the less are available to the reinsurer for investment purposes.
Be aware
Interest on the amount of the reserve is usually paid to the reinsurer when the reserve is adjusted. Reference copy for CII Face to Face Training

E Calculation of reinsurance premiums and claims

recoveries
The reinsurance premium is the price of the cover charged by the reinsurer in consideration for offering
to underwrite the risk. In all contracts of reinsurance, the premium is a reflection of the insurer’s risk
passed to the reinsurer. The basis for calculation of the reinsurance premium varies according to the
type of reinsurance contract. There are, however, a number of different definitions of the insurer’s
premium income on which the reinsurance premium is based.

In the case of proportional reinsurance, the premium income means the total of all the original premiums
The premiums are
usually gross received by the ceding insurer which are passed, i.e. ceded to the reinsurer. The premiums are usually
gross, as written by the insurer, but occasionally they can be the original net premiums. We have seen
that premiums are calculated in proportion to the amount of risk transferred so, for example, if 50% of
the sum insured is to be ceded then the reinsurer will receive 50% of the premium, from which – in most
cases – an allowance is made in the form of commission to cover the ceding insurer’s business
acquisition costs.