Chapter 5 - Features and operation of non-proportional reinsurance treaties

Question 1

The amount assumed per loss by the reinsured is variously known as:

Answer 1

• Deductible, retention, excess or first loss

Question 2

What is the reinsurers part of a loss called?

Answer 2

• Limit of cover

Question 3

What special consideration exists, when purchasing reinsurance, for a motor insurer
issuing original policies providing third-party personal injury and property damage
insurance?

Answer 3

It must ensure that its last layer of protection is unlimited if this is required by local
compulsory third party insurance requirements or it may find itself having to retain,
in addition to its agreed retention, any loss amounts that are greater than the total
amount of reinsurance purchased.

Question 4

What are the advantages of excess of loss treaties?

Answer 4

• Accounting procedures are simpler than proportional coverage
• Administration costs are substantially reduced because there is less movement within the account.
• The reinsurance premium is predetermined.
• Usually, there is no profit commission

Question 5

What is a cash call limit?

Answer 5

• It allows the insurer to ask the reinsurer to pay its share of any large loss over a predetermined figure immediately.

Question 6

What are the disadvantages of excess of loss treaties?

Answer 6

• Calculation of excess of loss premium is more complicated
• Cost of reinsurance can vary year to year depending on loss ratio / reinsurance market
• The agreement can be profitable for the reinsured but not the reinsurer

Question 7

What are the different types of excess of loss treaty?

Answer 7

• Risk excess or per risk
• Common account protection
• Cat XL

Question 8

What is meant by working excess of loss cover per event (WXL/E)?

Answer 8

Where an event affects several risks, this will also result in several losses for the excess of loss reinsurance.

Question 9

What is meant by working cover?

Answer 9

A working cover is a treaty on which the reinsurer expects to pay some losses; reinsurance underwriters say that the cover is substantially exposed by the primary insurance policy limits.

Question 10

What is meant by common account protection?

Answer 10

An arrangement which protects both the reinsured and its proportional reinsurers

Question 11

What is meant by catastrophe or per event cover?

Answer 11

a catastrophe excess of loss treaty provides protection for the reinsured where
one catastrophic event causes losses on various original insurance policies which, in total, exceed the amount the reinsured is prepared to retain on each and every catastrophic event. This protects the reinsured from an accumulation of its retentions on original risks after the application of any prior per risk reinsurance on a proportional or non-proportional basis.

Question 12

What other factors contribute to the increasing prospect of catastrophic losses
occurring?

Answer 12

Concentration and accumulation of risk arising from general urbanisation,
increasing insurance penetration, increasing insured values with inflation, and the
apparent effect of changes in climate giving rise to an increased incidence of
weather-related claims.

Question 13

What is a stop loss treaty?

Answer 13

A reinsurance treaty in which the insurer is refunded by the reinsurer for any claims in excess of a specified proportion of the premiums received.

Question 14

What is gross net retained premium income (GNRPI)?

Answer 14

Gross net written premium income (GNWPI) is the dollar amount of an insurance company’s premiums that are used to determine what portion of premiums is owed to a reinsurer. Gross net written premium income is the base to which the reinsurance premium rate is applied, taking into account cancellations, refunds, and premiums paid for reinsurance coverage.

Question 15

What are the advantages of a stop loss treaty?

Answer 15

• Guarantees to meet retained losses that exceed a pre-agreed percentage or amount of the insurers net retained income

Question 16

What are the disadvantages of a stop loss treaty?

Answer 16

• Stop loss is unlikely to be used for motor and liability losses due to the long tail nature of claims
• Substantial loss has to occur for stop loss to come into effect
• Limited market for stop loss

Question 17

Why is the proportional method of allocating premium to reinsurers inappropriate for non-proportional business?

Answer 17

For non-proportional business, when a loss occurs the reinsurer’s cover is not
exposed until the insurer’s retained amount is exhausted so for low level losses the
reinsurer escapes having to make any payment. The reinsurer cannot expect to
receive a proportion of all the original premium when it will only have to pay the
larger losses.

Question 18

What is gross written premium?

Answer 18

The total premium on insurance underwritten by an insurer during a period before
deduction of any outwards reinsurance premium deductions for retrocession cover.

Question 19

What is Net written premium (NWP)?

Answer 19

Written premiums net of outwards reinsurance premium deductions for retrocession/
reinsurance cover.

Question 20

What is Gross net written premium?

Answer 20

Gross written premium net of policy cancellations and outwards reinsurance
premiums but gross of commissions and expenses.

Question 21

Gross net earned premium income (GNEPI)?

Answer 21

Represents the earned premiums of the reinsured company during the period for the
lines of business covered net, meaning after cancellations, refunds and premiums
paid for any reinsurance protecting the cover being rated.

Question 22

Gross net earned premium (GNEP)?

Answer 22

Gross earned premium less any policy cancellations and outward reinsurance
premiums but inclusive of commissions and expenses.

Question 23

Gross net retained premium income (GNRPI)?

Answer 23

Gross premium income less policy cancellations and returns less the premium outlay
for all other reinsurances with no deductions allowed for the reinsured’s costs.

Question 24

Where is an adjustable premium used?

Answer 24

Adjustable premiums are used in non-proportional reinsurance where the premium base on which the premium is calculated can only be estimated at the start of the contract. The final premium can only be calculated once the contract period has come to an end.

Question 25

What basic information is required for rating non-proportional reinsurance?

Answer 25

• Annual premium income over a period of time
• Structure of the reinsurance arrangement
• Historical loss
• Structure of the portfolio to be reinsured

Question 26

What are the two different rating methods which exist for non-prop reinsurance?

Answer 26

• Experience basis - in accordance with the experience, with projection into the future;
• Risk exposure basis - in accordance with the risk exposure.

Question 27

What detailed information is required for rating non-proportional reinsurance?

Answer 27

• Original underwriting limits
• The basis of these limits
• Claims experience
• Nature of the account
• Risk profiles
• Cat perils
• Underlying protections
• Number of reinstatements
• Limit & Retention required

Question 28

Extraneous factors for rating non-proportional reinsurance?

Answer 28

• Effect of inflation
• Currency fluctuations
• Relationship with reinsurer
• Quality of business
• Gross net retained premium income

Question 29

What are the components of a non-proportional reinsurance premium?

Answer 29

• The risk premium - covers the expected average loss cost to the cover
• Fluctuation premium - cover random deviations of the claims experience
• Provision for the cat loss that will occur at some point
• Provision for acquisition costs
• Margin for reinsurer profit