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4/26 M97/February 2018 Reinsurance

Question 4.6
An event limit restricts the loss payments per event under a proportional reinsurance treaty whereas a cession limit
restricts the total sums insured ceded into a reinsurance treaty for a whole country or a specified cession limit zone.
A combination of the event limit with a cession limit and/or annual loss limit is possible where natural perils are
concerned, such as earthquake, windstorm or flood since the reinsurer is looking to limit its catastrophe exposure.

This becomes yet another underwriting consideration as reinsurers seek to quantify, in advance, their ultimate
exposure to such a natural perils event from all their inwards acceptances in that country, region or zone.
If a natural perils event affects a proportional treaty, then the reinsurer must ensure that any treaty recoveries comply
with the stipulations contained in such treaty event limit clause, and also any treaty cession limit clause, if
applicable.
One potential variation of this problem is explained below. It is impossible to be prescriptive about how the problem
is best addressed since this needs to be the subject of separate negotiation between the parties to the reinsurance
contract.
4 However, the following illustrates one hypothetical example of how event and cession limits collide, although there
Chapter are many other combinations and permutations.

• An insurer reinsures its North American property account against natural perils on a 50% quota share treaty
subject to a maximum cession of US$2m any one risk. It passes 50% of its qualifying premiums, after
deductions, to the reinsurer along with the same percentage of its potential liability and expects to recover 50% of
any qualifying loss.
• An event limit of three times the single risk limit applies.
• The insurer cedes ten individual risks up to the limit any one risk.
• A windstorm ‘event’ affects five of those risks creating losses up to the single risk limit but exceeding the overall
event limit.
• In the absence of the event limit the insurer will recover up to the maximum cession any one risk limit in each
case.
• However, the event limit effectively caps the insurer’s recovery even though it has made a full proportional Reference copy for CII Face to Face Training
premium payment to the reinsurer in good faith.
Calculate:
1. the reinsurance recovery taking into account the application of both the event and cession limits; and
2. the recovery that would have been possible had the event limit not been in place.
3. Would your calculation be different if the five risks had been affected by separate losses rather than one
‘event’?