Excess Reinsurance

Question 1

XPR Characteristics (7)

Answer 1

(1) Covers multiple property lines of commercial and HO (incl allied lines); does NOT cover comp or coll Auto bc limits wouldn’t trigger XPR
(2) Responds on a per risk, per occurrence basis – usually no reinstatement unless well into 10M+ limit
(3) Each loss is ceded to the contract separately – will have multiple retentions in one occurrence
(4) Layer XPR to build primary policy capacity (use FAC on top); layers important to find competitive prices, cost-effectiveness
(5) Layers do NOT inure to each other when stacked
(6) Definition of “Risk” is critical
(7) Provides good vertical recovery

Question 2

XPR Reinsurance Function Scores

Answer 2

(1) Financing – NOT EFFECTIVE (no PHS relief)
(2) Increased Primary Policy Limit – VERY EFFECTIVE (useful for providing competitive property coverage limits)
(3) Increased Premium Capacity – EFFECTIVE (not very useful bc does not cede as much premium / give PHS relief)
(4) Stabilization – VERY EFFECTIVE (very useful as it takes the volatility out of high losses)
(5) CAT – SOMEWHAT EFFECTIVE (takes a portion of significant losses but per occurrence caps and low limits reduce efficacy)

Question 3

Casualty XOL Characteristics (3)

Answer 3

(1) Responds on per occurrence basis – no per occurrence limit, losses are aggregated together and only one retention but limit can be exhausted quickly
(2) Covers multiple casualty lines in HO and Commercial (includes GL, Umbrella, WC, etc)
(3) All underlying policies protected even if limits don’t reach past retention – bc of the aggregated losses

Question 4

Ways Casualty XOL can respond (4)

Answer 4

(1) Per policy, per occurrence
(2) Per insured, per occurrence
(3) Per person, per occurrence (WC specific)
(4) Claims made

Multiple retentions if multiple policies are involved in an occurrence

Question 5

Subject Loss vs Primary Policy Loss

Answer 5

Losses subject to RI contract are not always the same as the primary policy loss due to coverage being different (e.g. auto coll claim as part of a crash that is covered by BI)

Subject losses also different when you have inuring RI

Subject loss are defined in the Ultimate Net Loss Article (UNL)

Question 6

Ultimate Net Loss includes

Answer 6

(1) Compensatory loss
(2) Pre / Post Judgment Interest
(3) ALAE (included litigation, defense, declaratory judgment)

Question 7

Ways to treat ALAE in XOL

Answer 7

(1) Pro Rata in addition to subject loss – calculate RI portion of indemnity (%) and apply to ALAE amount for the loss (limit does NOT apply, if no RI payment then no ALAE, if per occurrence cap you pro rate across all claims)
(2) Part of UNL – add ALAE to UNL and apply to reinsurance structure (limit will apply, risk runaway ALAE)

Question 8

Casualty XOL / Excess per Occurrence Reinsurance Function Scores

Answer 8

(1) Premium Capacity – EFFECTIVE
(2) Primary Limit Capacity – VERY EFFECTIVE
(3) Stabilization – VERY EFFECTIVE
(4) CAT Protection – SOMEWHAT EFFECTIVE
(5) Increasing PHS – NOT EFFECTIVE

Question 9

Methods for Setting Retentions and Limits for RI tower

Answer 9

GOAL is to keep predictable losses and cede unpredictable

Analyze historical loss frequency & severity

And can look at limit profiles

Question 10

Loss Cost

Answer 10

SEP / loss in layer

Loss cost is “loaded” to get RI premium (usually 100/80ths or 1.25)

Question 11

Exposure Rating vs Experience Rating

Answer 11

Exposure rating is based on limit profiles and industry data… used when historical data is not available

Experience rating is based on historical loss data

Question 12

Flat Rates vs Swing Rates

Answer 12

Flat rate is rate applied to premium to get ceded premium; usually loss cost with load (easy does not change with losses)

Swing rate varies with loss experience so you usually see only on working layers where losses are expected / modeled

Question 13

Multi Line

Answer 13

P&C Excess cover – includes XPR and XOL with a basket retention

Question 14

Reinstatements

Answer 14

Used on high limits of excess… pro rata of the layer limit used * ceded premium

Keeps cost of RI low

Question 15

AAD v Franchise Deductible

Answer 15

AAD – cover it once in aggregate and then start collecting… when the AAD runs out, be sure not to take a full recovery in the layer at the time it runs out

FD – only recover for losses that exceed the franchise deductible; for those losses treat normally (less the retention only)

FD is only the gatekeeper, has no effect on the retention after the fact