1. RI Accounting for Proportional Treaties
Mrs. Achala Nayak
Director
J B Boda & Co (S) PTE LTD.,
Singapore

2. What is Reinsurance? It is a Risk Transfer from an Insurance Company.
It is Insurance of Insurance
An Insurance Company pays Premium to Reinsurance for the Risk Transfer.
A Reinsurance Company pays Losses to the Insurance Company.
All these transactions are in a pre-decided proportion.

3. What is Retention? Retention is an amount,
an insurance company is willing
to risk for its own account
from a single loss

4. Why Reinsurance ?
An Insurance Company has its own limitations to write business, linked to:
Its Capital and Free Reserves.
Size of the Risk, its Occupation & Premium
Accumulation of RisksPremium.
Profitability of Portfolio
Reinsurance Programme used
Market Forces and Reinsurance Capacity available
Such factors influence an Insurer to limit its own retention and to effect Reinsurance

5. Methods of Reinsurance
PROPORTIONAL
Facultative
(single risk)
Treaty
(multiple risks)
Quota Share.
Surplus
Fac. / Obligatory.
Open Covers
NON PROPORTIONAL
Facultative
(single risk)
Treaty (Contracts)
(multiple risks)
Risk XOL.
Catastrophe XOL.
Stop Loss XOL

6. Facultative RI Characteristics Similar to co-insurance;
Simplest and oldest method;
Optional i.e. free choice to decide;
Single risk method;
Full disclosure of all facts.
Follows all original policy conditions

7. Facultative RI Advantages
In case of a small portfolio, where Treaty is unattractive;
Where risk is outside the scope of the Treaty - e.g. excluded class or Geographic Scope;
Where S I exceeds the Treaty Limit;
Expertise and capacity of big reinsurance can be used,
Where the risk is hazardous and might destabilise the Treaty

8. Facultative RI Disadvantages Full disclosure of the material facts.
Delay in seeking support.
High administrative costs in negotiation and administration.
Lower rates of commission.
No Profit Commission.
Risk of overlooking the renewal placement.
Negotiation procedure to be adopted at each renewal

9. Premium and Loss Distribution in Facultative RI

10. Accounts for Facultative
Since Fac RI is a single risk transaction, rendering of statement of premium & Claims known as “Closing” is on individual basis.
At times there is PPW & the Cedant and the Broker must adhere to it.
Closing must follow within a reasonable time after the signed line is advised and certainly before the expiry of the PPW. If for any reason, there is a delay, Reinsurer’s permission needs to be taken for extension of PPW.

11. Accounts for Facultative
Name of Broker & Ref. No.
Name of Cedant & Ref. No.
Name of Assured and location.
Period of Cover / Perils Covered
TSI, Rate, Deductions
Actual working of 100% Premium
Reinsurer’s % share and the amount of net premium

12. Accounts for Facultative
As regards Facultative Claims:
Each claim is Cash Claim, in so far the approval of the reinsurer is concerned.
Irrespective of the amount of the claim, they should not be adjusted in the remittance statement without obtaining concurrence of the reinsurer.
The Facultative claim advice will contain:
Name of Broker & Ref. No.
Name of Cedant & Ref. No.
Name of Assured and location.
Period of Cover Date of Loss
Perils covered Cause of loss
Amount of Loss Intimated Settled
Outstanding
Reinsurer’s % share and share of loss

13. What is a Treaty? It is a contract / agreement
Gives automatic and continuous Capacity to an Insurance Company.
Predefined Scope for
Period
Class / Classes of business
Retention and Cession limit under treaty
Geographical Scope
Also exclusions are specified.

14. Quota Share Treaty Characteristics Advantages Disadvantages
Obligatory in nature.
Retention and cession on every risk
Operates on fixed percentage basis.
Meaningful retention required
Advantages
Simple form & easy to operate and administer.
Works like a partnership & Useful for a new company or for a new class of business, where the results of business are unpredictable.
Useful for reciprocal exchange.
Disadvantages
Inflexible method of RI (unless VQS). Fixed percentage of premium on each ceded risk forces large outflow of Premium.
Fails to reduce incurred claims ratio on the retained account.
Capacity offered is limited.

15. How does a QS treaty Work?
Every Risk to be Ceded
Risk SI 100,000
Premium 20,000
Loss 25,000
Cedant
Reinsurer
Retains fully 100,000
Premium 20,000
Loss 25,000
Net balance: (5,000)
If No Treaty
Retains 50% 50,000
Premium 10,000
At 30% rate
Gets Comm. of 3,000
Retains Loss 12,500
Net balance: 500
50% QS cession 50,000
Premium 10,000
Pays Comm of 3,000
Loss 12,500
Net balance: 5,500

16. Quota Share Treaty Cession

17. Surplus Treaty Characteristics Obligatory in nature.
Cession of policies, where SI exceeds the gross retention.
Hence retention on every policy, but cession may not be on every policy (Like QS).
Placed in terms of lines (not in % like QS)
Capacity Treaty, as capacity can be stretched through number of lines & through creation of first, second and third surplus treaties.

18. Uses of Surplus Treaty To handle large risks.
Simple and small risks well within the retention capacity can be fully retained.
Higher retained portfolio generated through retained premium & premium reserves.
Higher underwriting capacity.
Besides receives Profit Commission, if treaty produces profitable results.
Useful for reciprocal trading.

19. How does a Surplus Treaty Work?
Capacity expressed in Lines (Times of Retention).
If retention is say 100,000 and the Surplus Treaty is of 10 lines, then the Capacity is 1,000,000.
Since it is a Surplus Treaty, the Reinsured will retain all risks up to SI of 100,000 and cede the balance to the Surplus Treaty.
Therefore every risk will not go to the Surplus Treaty Reinsure.

20. Surplus Treaty Risks Distribution

21. QS & Surplus Treaties: Cessions

22. Distribution of Risk over QS & Surplus Treaties

23. Distribution of Risk over QS & Surplus Treaties

24. Risk Distribution over an RI Programme
QS Maximum 100% limit Rs. 500
Retention 40% and Cession 60%
1st Surplus of 8 line and 2nd Surplus of 8 lines
TSI %
Premium
Loss
Risk details
10,000
2,000
4,000
QS Retention
200 2% 40 80
QS Cession
300 3% 60
120
1st Surplus
40%
800
1,600
2nd Surplus
Facultative
1,500
15%
600
Total
100%

25. Why do we require RI A/c ? U/W and A/C are inextricably related.
They are two sides of the same coin.
Together they determine the financial performance of the Reinsured and the Reinsurer.
A Statement of Account (SOA) is summary of Ceding Companies transactions of
Premiums and Claims,
For a Class of business,
For a Period of time.

26. Why do we require RI A/c ? Because:
They are the records of transactions between the parties to an RI Contract.
Information contained in the RI A/c is required by the Reinsurer to enable it to prepare:
A/c for its own retro-cessionaries.
Financial A/c (i.e. Profit & Loss, Balance Sheet) and to file returns to the Regulator.
Provide data for assessment of technical reserves (i.e. unearned premium and O/S loss) and for preparation of underwriting statistics & evaluation of each treaty.

27. Premium Bordereaux Purpose:
To record each cession of premium to the reinsurance treaties so that:
premiums can be allocated easily to reinsurance;
there is a convenient list of cessions that can be used as the basis for allocating claims;
statistics may be compiled easily;
reinsurers are aware of the type of business that they are accepting.

28. Premium Bordereaux Class: e.g. fire, accident, etc..
Month: a bordereau should be prepared for each month.
Page number: to ensure that pages are not misplaced if the bordereau for a month runs onto more than one page.
Date: date of preparation of bordereau.
Reinsurer: to identify the reinsurer to whom the bordereau is to be sent.
Reinsurer’s share: for the reinsurer’s reference.

29. Premium Bordereaux
Cession number: so that each cession to reinsurance can be identified a sequential number is allocated.
Policy number.
Name of insured.
Effective date: date of commencement of policy, renewal date or date of endorsement, alteration, etc.
Expiry date: date of termination, etc. of policy.
Type: type of premium (e.g., 1 - renewal; 2 - new; 3 - endorsement; 4 - cancellation; etc.)
Building: use of building, e.g., dwelling, farm, office, etc.
Sums insured and premiums

30. Claims Bordereaux Purpose
To record each claim to be recovered from the reinsurance treaties so that:
claims can be recovered correctly from reinsurers;
statistics may be compiled easily;
reinsurers are aware of the losses they are being asked to pay and can establish adequate reserves.

31. Claims Bordereaux Class: e.g., fire, accident, etc.
Month: a bordereau should be prepared for each month.
Page number: to ensure that pages are not misplaced if the bordereau for a month runs onto more than one page.
Date: date of preparation of bordereau.
Reinsurer: to identify the reinsurer to whom the bordereau is to be sent.
Reinsurer’s share: for the reinsurer’s reference

32. Claims Bordereaux Policy number.
Cession number: so that each cession to reinsurance can be identified a sequential number is allocated.
Name of insured.
Claim number.
Date of loss: so that the loss can be allocated to the correct year’s reinsurers.
Type of loss: theft, fire, etc.
Payment: to identify multiple part payments of a loss. The column should be completed with “first”, “second”, etc., and, when a final payment is made “final” should be entered so that reinsurers will know that they can close their file on the loss.

33. Claims Bordereaux
Gross loss: the amount of the payment to the insured (or third party) by the company.
Gross expenses: the amount of additional expenses incurred in settling the claim, for example loss adjusters’ fees.
Total loss and expenses: the sum of columns 8 and 9.
Retained loss: the amount of the loss that falls to the company after recoveries from reinsurance.
Losses ceded: the amounts to be recovered from various reinsurance arrangements.

34. Loss Notification The details of the loss are as follow:
SHOULD BE ON COMPANY LETTER-HEAD, MENTION DATE, TREATY NAME & U/W YR
The details of the loss are as follow:
Insured: ___________________________________________
Policy number: ___________________________________________
Policy period: ___________________________________________
Claim number: ___________________________________________
Date of loss: ___________________________________________
Cause of loss: ___________________________________________
Circumstances of loss: ___________________________________________
___________________________________________
Estimated gross loss: ___________________________________________
Estimated treaty loss (100%): ______________________________________
It is/is not expected that a cash loss settlement will be requested in respect of this claim. We will keep you informed of all developments regarding this claim.

35. Cash Loss (CL) To enable immediate recovery of very large losses.
If CL Limit is 1,000,000, a loss recovery of more than 1,000,000 becomes eligible for immediate Cash Call.
CL settlement by Reinsurer is kept in suspense A/c which is squared off when that particular loss is included “Paid Claims” of statement of account & CL Credit is given to reinsurers who have paid the claim.

36. Submission of SOA At regular intervals, a: treaty account
will be dispatched to all reinsurers. The account will contain technical and financial items and forms a statement of amounts due to or from the reinsurer.

37. SOA will usually have following debit and credit items
Credited to Reinsurers
Premiums net of returns and cancellations.
PR Released.
LR Released.
Interest on Reserves.
P P/F incoming.
L P/F incoming.
Refund on Cash Loss
Debited to Reinsurers
Ceding Commission.
Tax on Premium.
PR retained.
LR retained.
Paid Claims.
P P/F Withdrawal.
L P/F Withdrawal.
Profit Commission.

38. Company Letter Head U/W Year Quarter 3rd Q Treaty Name & Quarter Period: to Date
QUARTERLY STATEMENT
DEBIT
CREDIT
PREMIUMS: RECEIVED - RETURNED
50,000
30%
15,000
REINSURANCE 5%
2,500
CLAIMS PAID LESS RECOVERIES
PREMIUM RESERVE 35%
17,500
PREMIUM RESERVE RELEASED (PREV Q)
20,000
INTEREST ON PR RELEASED
200
BALANCE
20,200
TOTAL
70,200
BALANCE BROUGHT FORWARD
J B BODA SHARE: 30% %
Net payable
EAGLE REINSURANCE CO
10.00%
2,020
SPARROW REINSURANCE CO
15.00%
3,030
PARROT REINSURANCE CO
5.00%
1,010
30.00%
6,060

39. Periodicity of rendering Accounts
Accounts can be rendered on Quarterly, Half-yearly basis.
Traditionally Quarterly system is used and is more desirable for Reinsurers as accounts prepared on longer duration delay receipt of premium & also delay submission of information.

40. Commission
Consideration to meet actual net acquisition cost, excluding salaries of staff.
An agreed % of Premium, paid by the Reinsurer to the Reinsured.
Influencing factors:
1. Type of Treaty.
2. Class of business.
3. Country.
4. Results.
Usually uniform to all participants.
May differ for reciprocity.

41. Commission Usually three methods employed: Flat Percentage method.
Flat Percentage plus Additional Percentage.
Sliding Scale method.

42. Flat % Commission This is the simple and most commonly used method.
The percentage of commission is defined in the treaty slip, say 35%. This percentage is to be applied to the gross or net premium, accounted in that Quarter (as defined in the terms) to arrive at the commission.
Gross Accounted Premium 1,000 X 35% = 350 commission.

43. Flat + Additional Commission
This is rather uncommon method.
A fixed percentage of commission is guaranteed.
Besides, depending on the loss ratio, at the end of the year additional commission is payable to the Cedant.
Example commission 30% + 2 ½ % is LR below 60%.

44. S/S Commission
Sliding Scale method ensures that the actual rate payable is directly related to the loss ratio.
Which means more commission in good years and lower commission in bad years.
Key factors:
Payment of provisional commission.
Calculation of loss ratio.
The Sliding Scale of Commission table.
Minimum and Maximum rate of commission payable.
Payment of actual commission due.

45. S/S Commission Provisional Commission:
Unless loss ratios are known, the actual commission can not be determined. Hence provisional (interim) commission payable. Usually this is fixed mid-way between the minimum and maximum rate.
Minimum rate is 25%
Maximum rate is 35%
Provisional Commission will be 30%. This is considered equitable as neither party can pre-judge the final result of the treaty.

46. S/S Commission
Calculation of Loss Ratio will depend on method of accounting – whether Underwriting year or Accounting Year.
For underwriting year method of accounting it is unusual to have S/S commission e.g. Engineering, Marine and Aviation business – because these years take many years to fully develop.
Reward for profit are dealt with through Profit Commission.

47. Calculation of L/R for S/S commission run-off Treaties
Loss ratio, being calculated at various points in development of one u/w year, will keep on changing until all liabilities expire. The rate of commission directly related to loss ratio, the actual level of commission payable to the Cedant will fluctuate and adjustments will have to be done accordingly. Amount of administrative work involved in this calculation is enormous.

48. S/S Commission Table
As per practice, the treaty terms would include a detailed scale of commission payable related to actual loss ratio.
To determine the actual rate of commission payable all that is necessary is to select the appropriate rate from the scale.
Example: Loss Ratio 52.8% Commission 28.50%
Loss Ratio 66.60% Commission 21.50%
Loss Ratio 78.20% Commission 15.50%

49. S/S Commission- Min & Max Rates
The S/S commission will have a min rate and a max rate.
The min rate reflects the least amount of commission that the Cedant requires to take care of its acquisition costs.
The max rate reflects the highest amount of commission the Reinsurer is willing to give.
S/S commission itself includes the rewards for profitability, hence it is not usual to encounter the S/S commission and the PC in the same treaty, although it may happen in practice.

50. Calculation of L/R for S/S commission
Formula used: (U/W year based treaties)
Incurred Loss X 100
Earned Premium
Incurred Loss
Losses Paid during the year + O/S at the end of the year
+ Reserve for O/S loss at the end. (LR)
- Return Reserve for O/S Loss from the previous year. (RLR)
Earned
Premium
Premiums Ceded for the year (P)
+ Return reserves for unearned premium from previous year (RPR)
- Reserve for unearned premium (PR)

51. Calculation of L/R for S/S commission
Formula used: (Clean Cut Treaties)
Incurred Loss X 100
Earned Premium
Incurred Loss
Losses Paid / debited during the year
Incoming loss portfolio transfer
+ Outgoing loss portfolio transfer
Earned
Premium
Gross Premiums Ceded during the year
+ Incoming Premium Portfolio
- Outgoing Premium Portfolio

52. Calculation of L/R for S/S commission Clean-cut Treaties
Portfolio Premium and Losses apply at the beginning and at the end of the year, regardless of Reinsurer’s share is new, increase, reduced or cancelled. Formula as follows:
Incurred Losses
Losses Paid for the year +
P/F losses withdrawn at the end -
P/F Losses assumed at the beginning
Earned Premium
Premium ceded for the year
P/F Premiums assumed at the beginning
P/F Premiums withdrawn at the end

53. Final adjustment of S/S Commission
Until the loss ratio is known, provisional commission is paid. Adjustment is done at the end of the year.
Assuming S/S Comm is 27.50% to 37.50% with provisional commission of 30% adjustment as follows:
1st Q Premium
40,000
30%
12,000
2nd Q Premium
50,000
15,000
3rd Q Premium
60,000
18,000
4th Q Premium
30,000
9,000
Total
180,000
54,000
Actual Commission due from L/R 32.50% applicable to 180,000
58,500
Adjustment commission due to Ceding Co.
4,500

54. Overriding Commission
In Retrocession Treaties “Commission” will include “Original Commission + Profit Commission + Brokerage” in addition to this an Overriding Commission will be charged.
Sometimes in highly profitable & very well balanced treaties O/R commission is given.
Usually ranges between 2% to 5%.

55. Profit Commission (PC)
PC is the reward given to the reinsured for providing profitable business, by the reinsurer.
Amounts to sharing of profits of a particular treaty.
Payable in addition to commission.
Applicable to Proportional treaties and rarely seen on Non Proportional Treaties or Facultative business.

56. Profit Commission (PC)
The simplest definition of Profit is Income less Expenses.
The profitability of a reinsurance contract is also determined using the same formula. The items which will appear under the heading “Income” and “Expenses” need to be seen carefully and they are explained as follows:

57. Profit Commission (PC)
Commission on Profit paid by the Reinsurers to the Reinsured as per a formula.
Income:
1. Written Premium
2. P/F Premium & Loss Entry.
Outgo:
1. Commission, O/R, Tax.
2. Paid Losses.
3. P/F Premium & Loss Withdrawal.
4. Management Expenses.
After deducting L c/f, PC % to be applied on balance.

58. Profit Commission (PC)
Management expenses are not an accounting item. It is a notional deduction in the PC statement allowing Reinsurer’s own expenses. This is to be calculated on the Gross Premium at the rate prescribed in PC formula.
Brokerage is not included in the outgo. Because it does not appear in the Ceding Company’s original accounts.

59. Profit Commission (PC)
Income
P/F Premium
P/F Loss Entry.
Original Gross Premiums included in the accounts for the current year.
Outgo
Commission.
Any other deductions.
Paid Losses & Loss expenses.
P/F Premium withdrawal.
P/F Loss withdrawal.
Reinsurer’s Management Expenses.

60. Profit Commission (PC)
Any Premium & Loss recoveries under reinsurances which inure to the benefit of the Agreement are to be taken into account.
Any excess of Income over the Outgo, will be considered as profit.
Reinsured shall render the PC statement to the Reinsurer for each annual period, according to the PC formula.

61. Profit Commission (PC)
Formula: PC 10%, deficit c/f to 3 years, ME 7.5%
(but results shown below are net of the ME)
Yr 1
Yr 2
Yr 3
Yr 4
Yr 5
U/W 1
(5,000)
(5,000) 1st Yr
(2,500) 2nd Yr
(2,500) 3rd Yr
U/W 2
2,500
U/W 3
(1,200)
(1,200) 1st Yr
(700) 2nd Yr
U/W 4
3,000
U/W 5
Result
(2,500)
(3,700)
(700)
2,300
10% PC
Nil
230

62. PC calculation for Engineering Treaty Underwriting Year 1. 1
PC calculation for Engineering Treaty Underwriting Year to
As at
As at
As at
As at
As at
INCOME
Premium
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
TOTAL INCOME
OUTGO
Commission at 25%
375,000
500,000
625,000
750,000
875,000
Claims Paid
500
1,000
1,000,000
Tax on 5%
75,000
100,000
125,000
150,000
175,000 5%
O/S loss at the end of yr
10,000
50,000
300,000
TOTAL OUT GO
535,500
751,000
2,250,000
2,850,000
3,325,000
Profit / (Loss)
964,500
1,249,000
250,000
PC at 20%
192,900
249,800
30,000
35,000
Less PC as last year
PC for this year
56,900
(199,800)
(20,000)
5,000

63. Super Profit Commission
Additional PC payable over and above the normal PC.
e.g. if the PC is 15% and Super PC is 30% the working will be done as indicated:-
Net Profit :60,000
15% PC : 9,000
Net Result :51,000
30% Super PC :15,300
Total PC payable:24,300

64. Outstanding Losses
Throughout the treaty period, claims occur on policies attached to the treaty.
Many of the claims are settled by the Insurer and charged to the reinsurer in agreed proportion.
However, some of these claims will not be settled before the end of the treaty year. These claims are known as Outstanding Losses.

65. Outstanding Losses
Ceding Company estimates the likely cost of Outstanding Losses and provides the total of the estimates to the reinsurer, usually at the end of the period.
This is for the purpose of information, so that the Reinsurers can make sufficient provisions for the losses to be paid at a future date.

66. Proportional Treaty Accounts
One of the following two methods is applied for preparation of Treaty Accounts:
Underwriting Year Accounting System (Run Off)
Accounting Year based Accounting System (Clean Cut)
The methods can be viewed at a glance in the following slide

67. U/W & A/C - at a glance Accounting Year 2002 2003 2004 2005 Total 100
U/W Yrs
2002
2003
2004
2005
Total
100 50
(120) 15 45 X 80 5
130
(55)
(10) 60
(130)
125
225
Result of each U/W year will be finalized when liability for that year is expired.
Result of each A/C year may include items for more than one U/W year

68. U/W & A/C - at a glance 1998 1999 2000 2001 Total U/W yr Year 1 Year 2
A/c Yr

69. U/W Year Method (run off)
Suitable for classes where
Policies issued for more than 12 months (CAR/EAR), premiums are collected over more than one A/c year & exposure to the losses also extends for same period.
Marine, Aviation, Liability, CAR, EAR etc. medium to long tail business
Delays in settlement of account due to
Legal judgment / medical consideration
Repairs to be carried out
Cost of repairs extended over length of time
Recoveries to be received over bonds / credit claims

70. U/W Year Method (run off)
Any claim affecting the reinsurance treaty is allocated to those reinsurers that received the premium for that risk.
In any given quarter, there can be claims and premiums relating to several underwriting years.
Therefore, it is essential to allocate premiums and claims to the correct underwriting years and to ensure that separate bordereaux and accounts are produced for each underwriting year.
Profit commission statements will also be prepared according to underwriting year.

71. U/W Year Method (run off)
A/c Yr 02
A/c Yr 03
A/c Yr 04
A/c Yr 05
Four Qtly A/c
Four Qtly
Run off A/c
Four Qtly
Run off A/c
Four Qtly
Run off A/c
Reinsurers
U/W 2002
Continue
PC Calculation
Revised PC
Revised PC
Revised PC
O/L Advice
Revised O/L
Revised O/L
Revised O/L
Four Qtly A/c
Four Qtly
Run off A/c
Four Qtly
Run off A/c
Reinsurers
U/W 2003
PC Calculation
Revised PC
Revised PC
Continue
O/L Advice
Revised O/L
Revised O/L
Four Qtly A/c
Four Qtly
Run off A/c
Reinsurers
U/W 2004
PC Calculation
Revised PC
Continue
O/L Advice
Revised O/L 6 12 18 24

72. U/W Year Method (run off)
2002
2003
2004 J F M A S O N D
Policy Incepts
Reinsurer for which year pays loss?
2002? 2003? 2004?

73. SOA for Run Off Treaty Credited to Reinsurers Debited to Reinsurers
Premiums net of returns and cancellations.
PR Released.
LR Released.
Interest on Reserves.
Refund on Cash Loss
Debited to Reinsurers
Ceding Commission.
Tax on Premium.
PR retained.
LR retained.
Paid Claims.
Profit Commission (annual)

74. Why Clean Cut A/c System?
Administrative costs for handling accounts are very high.
Large treaties are placed with a number of reinsurers, hence more administration.
Reinsurers may change their shares or cancel participation, hence Cedant may be required to allocate Premium, Deductions, Claims & other accounting items to many different reinsurers, until the liability is finally expired.
The concept of Portfolios was introduced to assist both Ceding Company and the Reinsurer in reduction of administrative expenses.

75. Portfolios
The period of reinsurance treaty does not correspond to the period of all original direct insurances.
Most of the policies will be still in force at the end of the reinsurance period and for which the reinsurer would have received full premium.
For example, if the reinsurance period follows the calendar year, an annual insurance policy issued at 1st July has at 31st December six months until expiry during which time a claim might occur.

76. Portfolios
A system has been developed whereby this unexpired liability can be withdrawn from a reinsurer canceling its participation and transferred to (assumed by) a new reinsurer who will receive a commensurate share of the premiums.
Thus, losses occurring before the date of cancellation are charged to the old reinsurer and losses occurring after the date of cancellation to the new reinsurer.

77. Portfolios
By the same technique, the liability in respect of losses that have not been settled at the time of the change in reinsurer’s participation on the treaty will be transferred to the new reinsurer together with the corresponding claims reserve.
The old reinsurer will no longer be charged with claims that were outstanding at the date of cancellation.

78. Portfolios
This transfer of liability between old and new reinsurers when a change in participations takes place are effected as soon as possible after the end of the reinsurance period and are handled by way of a:
premium and loss portfolio transfer account.
35% of accounted premium during the year
90% or 100% of losses outstanding at the end of the year

79. A/c Year Method (Clean Cut)
Brings into one revenue year all Premiums (less commissions and deductions) less claims payable, reported by the Cedant during that revenue year regardless the underwriting year to which the item relates.
Best suited for short tail class of business such as Fire & Accident where both Premiums and Claims are settled faster.

80. A/c Year Method (Clean Cut)
U/W
At the end of the year, the liability of Reinsurers is CUT by P/F premium & loss withdrawal and at the beginning of the nest year, the same liability is passed on to the Reinsurers of next year, by P/F premium and loss entry.
2002 A B C D
2003 E F
2004 G
2005
2006

81. A/c Year Method (Clean Cut)
2002
2003 J F M A S O N D
Expired portion of risks
Unexpired portion of risks

82. A/c Year Method (Clean Cut) format:
Credit
Premium Ceded
Portfolio Premium Entry
Portfolio Loss entry
PR Release
Loss Reserve Release
Interest (Less Tax) on Reserve Release
Credit for Cash Loss
Debit
Commission
Overriding Commission
Claims Paid
Premium P/F withdrawal
Loss P/F withdrawal
PR Retained
LR Retained
Taxes and Charged
Balance: Difference between Credit and Debit

83. Portfolio Premiums
At the end of an U/W year, there are a number of unexpired policies. The liability of current Reinsurers is transferred to the next reinsurers through P/F Premium and Loss Transfers. P/F Premiums are usually 35% or 40% of accounted premium during the year.
Earned
Premium
Unearned
Premium
Reinsurer A
outgoing
P/F Premium
Withdrawn
P/F Premium
Assumed
Earned
Premium
Unearned
Premium
Reinsurer B
incoming
P/F Premium
Withdrawn
P/F Premium
Assumed
Earned
Premium
Unearned
Premium
Reinsurer C
incoming

84. Portfolio Losses
This means, at the end of the treaty year, the outstanding losses are withdrawn by the Ceding Company and credit is given to the incoming reinsurers.
Paid Losses
Outstanding
Losses
Reinsurer A
outgoing
P/F Loss
Withdrawn
P/F Loss
Entry
Paid Losses
Outstanding
Losses
Reinsurer B
incoming
P/F Loss
Withdrawn
P/F Loss
Entry
Paid Losses
Outstanding
Losses
Reinsurer C
incoming

85. A/c Year Method (Clean Cut)
2002
2003
2004 J F M A S O N D
Policy Incepts
Reinsurer for which year pays loss?
2002? 2003? 2004?

86. SOA for Clean Cut Treaty
Credited to Reinsurers
Premiums net of returns and cancellations.
PR Released.
LR Released.
Interest on Reserves.
P P/F incoming.
L P/F incoming.
Refund on Cash Loss
Debited to Reinsurers
Ceding Commission.
Tax on Premium.
PR retained.
LR retained.
Paid Claims.
P P/F Withdrawal.
L P/F Withdrawal.
Profit Commission.

87. Loss Participation Clause
Reinsured shall reimburse to the Reinsurer 40% of the loss ratio exceeding 75% up to 100%.
Loss Ratio = % of Incurred Claims to Earned Premium.
Example 1
Incurred Claim 52,000 & Earned Premium 50,000  LR = 104%
Maximum loss participation by Reinsured is 40% of 25% i.e.5,000.
Example 2
Incurred Claim 30,000 & Earned Premium 50,000  LR = 60%
Since LR is below 75% the Loss Participation Clause not applicable.
Example 3
Incurred Claim 45,000 & Earned Premium is 50,000  LR = 90%
Reinsured will participate 40% of 15% LR ( 90% - 75%) i.e. 3,000

88. Commutation
This is early termination of a contract of reinsurance in return for mutually agreed level of consideration.
Relieves reinsurer of his obligation.
Any losses to the contract, after the commutation will be solely and totally borne by the reinsured.

89. Commutation
For example, on a Marine Hull Surplus Treaty U/W Yr 2000, there was a large claim advised – but not paid until 2009.
The 100% Reserves are say 10 m.
The reinsurer has to provide for this reserve every year. This costs him administration cost + affects his results.
Hence the commutation will be proposed for say 7.5 m settlement.

90. Premium Reserves (PR)
Originally meant to be a security against Reinsurer’s obligation under treaty.
Also legislative requirement in certain Countries.
PR are reserves retained at pre-fixed % rate (35 to 40)on Gross Premium of each quarterly / half-yearly account and released in corresponding account next year.
Interest is paid, at prescribed rate less IT.

91. Premium Reserves
In reciprocal trading PR are waived, if so desired by both the sides.
Non Reciprocal treaties waiving of reserves is favoured for “Cash Flow” underwriting.
Some times in a “clean cu” treaty P/F Premium entry is retained as PR and is released in each quarter, thus at the end of the year it is squared off.

92. Loss Reserves (LR)
Same purpose as PR – i.e. security against non performance of reinsurer.
Cover those losses, which have occurred but not paid.
Usually 90% of O/S losses
Some times include IBNR loading.
Interest is paid.

93. Loss Reserves
This is the consideration for Outstanding Loss liability and include Outstanding Losses + IBNR.
LR are usually 90% or 100% of Outstanding Loss + IBNR.
They are retained and released quarterly or annually as per the provisions of the treaty terms.

94. Example of PR & LR Retained & Released (1)

95. Example of PR & LR Retained & Released (2)

96. Various Reserves Strengthen Solvency of an Insurer
A = Paid Up Capital
B = Free Reserves
C = Premium Reserves
D = Loss Reserves
E = Cat or Disaster Reserves A B C D E

97. Unearned Premium Reserve
Despite resistance from reinsurers, it is common for ceding companies to retain a proportion of premium payable to the reinsurer. The motivation is normally that this deposit should serve as a guarantee against the failure of the reinsurer to meet its future liabilities. In some countries, the law requires this.
The calculation of premium reserves withheld should, theoretically, follow the same principle as that of portfolio premium. In practice, however, and for ease of administration, premium reserves are calculated at a fixed percentage of premiums. Very often the rate is 40%.

98. Methods of unearned Premium
Prorata Premium for EVERY POLICY
To be calculated by determining the proportion of each policy that extends beyond the treaty year.
For example: Policy Premium is 25,000 & period is 2nd May to 1st May
Unearned Period 1st Jan to 2nd May i.e. 121 days
121/365 X 25,000 =
Administratively cumbersome & expensive

99. Methods of unearned Premium
1/24th System.
Based on following assumptions:
Average policy ceded in any monthly period incepts in the middle of each month.
Average policy period is 12 months.
Therefore for the month of January 15 days of policy premium remains unearned i.e. 1/24th
For the month of February 45 days of policy premium remains unearned i.e. 3/24th.

100. 1/24th Method J F M A M J J A S O N D J F M A M J J A S O N D
Relatively accurate.
Ideally suited, where
spread of policies
ceded is unbalanced.
1/24th
3/24th
5/24th
7/24th
9/24th
11/24th
13/24th
15/24th
17/24th
19/24th
21/24th
23/24th

101. Methods of unearned Premium
1/8th System, is similar to 1/24th System. Only the Assumptions are different:
Average policy incepts in the middle of each quarterly period and expires in the middle of each quarterly period of the next year.
Therefore for the 1st quarter, ½ quarter of premium remains unearned at the end of the treaty year i.e. 1/8th; for the 2nd Quarter 1 ½ quarter of premium remains unearned i.e. 3/8th.
This method is also reasonably accurate & simple to calculate.
Depends on average policy period of 12 months.

102. 1/8th Method Treaty Year 1 Treaty Year 2 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3

103. Methods of unearned Premium
Flat percentage basis i.e 35% to 40% system
Least accurate of all systems.
35% to 40% of annual premium is withdrawn.
Unless policies are well balanced, this system will work against the interests of either party.
Most commonly used method, as simple and easy to operate.

104. Chain of Proportional Treaty A/c
Preparation of Premium & Claims Bordereaux
Loss Notifications
Cash Claim Advice
Rendering and settlement of A/c Q or H/Y
If S/s commission, adjustment at the end of the year
Submission of P/F withdrawal and entry for clean cut treaties.
Submission of Premium & Loss Reserves and release statements.
Submission of P/C statement.
Advise of O/S loss at the end of the treaty

105. Thank You