Page 187 - Fire Insurance Ebook IC 57

The Insurance Times

This treaty does not involve any proportionate sharing
of risks, like quota share or surplus treaties. So the
calculation of premium payable for excess of loss
protection becomes complicated .

The premium depends upon the nature and extent of
reinsurance required and the composition of the insurer's
fire portfolio. The rate is then decided depending on the
exposure to losses and on a "burning cost " method. The
burning cost is arrived at by taking a fixed time period
(e.g , 4 yrs) and calculating the ratio of claims paid and
the outstanding for the share of the excess of loss
reinsurance to the gross net premium income of the
company for that period.

This gives the "pure burning rate"( sufficient to cover

the losses suffered by the reinsurer) . It is then loaded

by a factor , e.g 100/70 to cover the reinsurer's

acquisition costs , administrative costs, and profit margin

to produce the final rate.

Example

Gross Net Premium Rs 55,00,000 ( 4 yrs)

Incurred Losses Rs 1,18,000 ( 4 yrs)

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